Over the past few years, the Federal Reserve Bank has tried to get inflation to around 2%.
Their main tool has been raising interest rates, a strategy that can lower inflation but slow down the economy, potentially pushing it into a recession. So far that hasn’t happened.
U.S. inflation peaked at a little over 9% in the summer of 2022, and is currently sitting around 3.5%.
For policymakers, the goal is to pull off something called a “soft landing.” This is where you slow the economy down and get inflation under control, but avoid a recession.
Economist Allison Schrager joined Texas Standard to explain why she thinks the economy may have already achieved a soft landing. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: You write that we’ve more or less achieved a soft landing. How do you come to that conclusion?
Allison Schrager: Well, I think it’s about as soft as it’s going to get.
I mean, inflation is down to a level that, you know, 20 years ago we would have been happy with. The job market is still very vigorous. Wages are still growing at about 4% – maybe even more than 4%.
So, you know, it’s hard to see how it’s going to get better. I think going from 3.5% to 2%, you know, it’s hard to see how that would happen without causing some damage to the economy. So if this is the soft landing we were promised, this might just be it.
So why is 2% the goal? What is it about that number that is what they’re reaching for?
Well, I mean, that is the Fed’s target, and the Fed does have at least an implicit inflation target. And, you know, their credibility is that “we pick an inflation number,” and then that is roughly what inflation is.
So, I mean, I’m not making an argument either way about whether or not we should go from 3.5% to 2%. I’m just saying that, you know, this might be in terms of can we get inflation down without doing much damage to the economy… That might just be where we are right now.
So you are feeling pretty optimistic about what they’ve achieved. But the Federal Reserve has yet to declare victory and say we’ve pulled off a soft landing. Why do you think that is?
Well, I think sort of giving up where they are now would be a huge blow to their credibility. The fashion now in economics is to assume the Fed’s most powerful tool isn’t necessarily adjusting interest rates, it’s that they have credibility and they say they’re going to do something and everyone believes they’re going to do it. And that is a very powerful tool to influence the economy.
So if they’re like, you know, “3.5% is good enough,” I mean, it would be a huge blow to their credibility and really force a huge rethink of how we do monetary policy.
Well, you mentioned credibility, and I understand that presidential politics – we’ve got a big election year coming up – and there’s been some pressure. Some are saying if they were to reduce interest rates now that that could be sort of a win for Biden. Do you think that they’re feeling any of that, too, or are they trying to put their blinders on and not pay attention to those pressures?
I think they’re trying to put their blinders on. They understand that the Fed has had a fairly easy job the last 20 years because they sort of just had this very sort of nice, low-inflation environment. They didn’t really have to make trade offs.
So now that they really have had to raise rates significantly the first time in a long time, you know, I think they’re out to prove that they, in fact, do have independence. I mean, whether or not they really do is definitely a question. But I think they’re trying to prove again that they have the credibility and they do need to take the economy down to 2%.
Now we’ve been talking about inflation, but one of the things the Fed Reserve keeps an eye on is the labor force. And this is also something you’ve written about recently in Bloomberg. You say “retiring at 65 or even 67 is just not realistic for most people’s finances or the government’s.” Can you explain a little bit more about what you mean by that?
Yeah, I mean, I think, you know, we’re realizing we’re living longer, we’re living better. And that’s a very expensive thing to finance. A 30-year retirement is a very expensive thing. It takes a lot of money to pay for that.
So I think ideally a lot of people would want to be working later. And working later doesn’t have to mean you’re doing the same job you are now, or you’re doing this job at the same pace. It could be that you are working part time or maybe consulting to your last employer, or maybe just doing bits of like consulting work to new clients.
So I think we need to sort of reset, really rethink. This is not only important for your personal finances, it makes a huge difference to your ability to finance retirement. They say even delaying work by six months means you can save 1% less your entire working life.
It’s also good for you, mentally. A very important part of healthy aging is staying engaged and having a sense of purpose and having socialization, in which work all achieves for you. So there’s a lot of good reasons to try to keep working as long as possible.
I could see people being skeptical about this, though, saying that, “you know, the economy’s supposed to be doing so well, but we’re all having to work longer.” How would you respond to that?
I would say it as like, we’re living longer. So we have to change our expectations.
You know, I think it’s just never been a realistic expectation that, you know, we would live longer and get to retire longer, too. I would take it as a good sign that, you know, as they say, “70 really is the new 50.” So that means you’re still working at 50, and that’s a realistic expectation. So that might mean you’re also working at 70.
I know it’s disappointing because you don’t think you have to work for that long. But I think we really need to rethink what we mean by work and what we mean by retirement. And sort of this abrupt departure from the labor force might just not be realistic financially for most people, but also might be a healthier way to think about different things.
Well, I don’t mean to open up a rabbit hole, but I think for millennials, for the Gen Z population out there, there’s sort of an assumption that Social Security might be completely broken by the time we are ready to cash in that as well. Are you more optimistic than I am about that?
Yeah, am. I mean, I think just politically, the idea of getting your Social Security is just going to be a nonstarter. I think if you look at sort of the history of debt crises, I mean, pensioners are always paid first. So the idea we’re going to get rid of Social Security, I don’t think it’s going to happen. It might be smaller than you expect.
Like, I mean, the worst case scenario with Social Security right now is if we do nothing, everyone would get a 20% benefit cut across the board. Now that would be really bad. But a 20% benefit cut is a lot less bad than a 100% benefit cut. So, I mean, that’s the worst case scenario and even that I doubt would happen.
