Fed officials increasingly believe the economy will experience a “soft landing.”

The central theses

• Fed officials have forecast higher economic growth and lower unemployment in the coming years than their last forecasts in December.
• This scenario would be a historically rare “soft landing” after the high inflation that flared up in 2021.
• A soft landing probably only occurred once, in 1994, while other phases of inflation only subsided after recessions and high unemployment.

If the Federal Reserve's latest economic forecasts are anywhere near accurate, the U.S. economy will recover from a period of high inflation without recession and mass unemployment – and depending on your definitions, you could count on just 0 hands. This has happened many times.

Officials at the Federal Open Market Committee are growing increasingly optimistic about the possibility of a “soft landing” in the economy rather than an economic crash due to high inflation that flared up in 2021 as the economy reopened after the pandemic, according to economic forecasts they released on published Wednesday.

When each member of the 19-member committee was asked about the future of key economic indicators, median responses expected the economy to grow faster and unemployment to remain lower than in the previous round of estimates in December. The median GDP growth estimate for 2024 rose from 1.4% to 2.1% and the unemployment forecast fell from 4.1% to 4%, with forecasts also receiving similar increases for 2025 and 2026. All of these numbers point to a healthy economy, not one in recession.

They also expect the federal funds rate to remain higher in 2025 and 2026 than in previous estimates, meaning there is less risk of having to cut interest rates to stimulate the economy and stave off a downturn.

“The belief that fewer cuts are needed next year likely indicates that the central bank is acknowledging a higher probability of a soft landing or that it will bring inflation back to its target without pushing the economy into recession,” Ryan said Sweet, chief U.S. economist at Oxford Economics, wrote in a commentary.

If these forecasts come true, it would be a historic turning point for the US economy. That's because the central bank has used its traditional hard medicine – aggressively raising its key interest rate – to combat inflation. And in the past, this remedy was effective, but had the undesirable side effect of slowing economic growth and causing a recession. Eight of the last nine times the Fed has aggressively raised interest rates has caused a recession in 2022, according to an analysis by Piper Sandler.

(Other economists see it differently, either crediting the Fed with several “soft” landings at various points since the 1960s, or pointing out that there was not very high inflation in 1994, making it questionable whether this episode even existed as such should apply soft landing.)

Now that inflation appears to be on a downward trajectory – albeit a bumpy one – the Fed is preparing to cut its key interest rate, thereby reducing the stranglehold that high interest rates have on all types of loans, from mortgages to… to credit cards, exercise. If inflation stabilizes without causing an economic downturn, the Fed will have found what economists call the “holy grail” of monetary policy: raising interest rates enough to cool the economy, but not by that much that they slow down growth.