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Friday, June 24, 2022

Today's newsletter is by Emily McCormick, a reporter for Yahoo Finance. Follow her on Twitter.

Federal Reserve officials are sticking to their script that there’s still a window – however narrow – for the economy to achieve a soft landing as the central bank raises rates.

But this week, Fed Chair Jerome Powell offered some acknowledgment that the chances of bringing down inflation while keeping economic growth steady have somewhat diminished.

A recession is “certainly a possibility," Powell told the Senate Banking Committee on Wednesday, while emphasizing this is not the central bank’s “intended outcome” as it raises interest rates to address rising prices.

Some economists, however, believe there remains a path for the Fed to still meet its "soft landing" goal.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, offered a three-pronged argument in a recent note on how the Fed can balance inflation and growth risks. In Shepherdson's view, margins, savings, and wages are the crux of how the Fed can thread this needle.

"First, we think that a big part of the disinflation story will be margin re-compression – from extraordinarily high levels – due mostly to rising supply, not falling demand," Shepherdson said. "That’s the opposite of the usual late cycle story, when margins are squeezed by a combination of rising labor costs and falling demand."

In other words, much of the leg work in bringing down rising prices could come from the supply-side, as retail and wholesale inventories have surged to pre-COVID levels or higher as supply chain pressures moderate. This is in contrast to inventories rising from sunken demand, which could augur a downturn and is most commonly seen ahead of recession.

While the demand side has started to soften, as Philadelphia Fed President Patrick Harker told Yahoo Finance this week, Powell clarified that lower demand growth is not necessarily synonymous with a recession.