Happy News: The Fed may have spanked inflation

Happy Sunday

Today we are keeping it short and sweet and chatting about where we are at w/ inflation.

The Fed’s done something pretty solid—they’ve managed to cool down inflation without screwing over the economy. That’s a big deal (historically), and they’ve handled it like champs. Still, there’s some stuff to keep an eye on, like tariffs or ww3 of course.

Lets dig in…

The Fed's Elite Club: A History of Soft Landings

Pulling off this inflation-taming trick without triggering a downturn is no small task. Princeton economist Alan Blinder, a former Fed vice chair, notes that from 1965 to 2019, only five of the eleven tightening cycles had "soft or softish landings." This is such a goober term but for whatever reason it stuck.

The most famous example? In the mid-1990s, Alan Greenspan's Fed raised interest rates from 3% to 6% in 1994. Then, in 1995, they skillfully lowered them again. This move created what Blinder called a "perfect soft landing." Now, today's Fed is part of this exclusive group. Theoretically, when we look at inflation data - they handled rising inflation and the effects of the pandemic like pros.

The Fed's Balancing Act

The Fed's main tool is adjusting interest rates. This helps fight demand-driven inflation, which happens when consumers spend too much. Supply shocks, like the gas price surge in 2022 after Russia invaded Ukraine, are trickier. They are beyond the Fed's direct control. Here, the goal is to keep demand from making things worse.

Tariffs, like those floated by Trump, act as supply shocks too, pushing prices up. If the Fed raises rates too much, it could hurt demand and cause a recession. The San Francisco Fed's data show the team has managed demand-driven inflation. They did this without harming the economy. That's a rare win for the Fed.

Cyclical vs. Acyclical: A Sneaky Threat

Core inflation has two types: cyclical and acyclical. Cyclical inflation includes costs like clothing and dining, which vary with the economy. Acyclical inflation includes less predictable factors.

Cyclical inflation is easing and should normalize by 2025. But acyclical inflation? It's stirring again. If tariffs hit, they could fuel this unpredictable rise, complicating the Fed's job.

The Road Ahead: Tariffs and Expectations

Trump eased some tariff plans due to market worries. Still, the April 2 deadline is near. The New York Fed's February survey shows that consumers expect 3.0% inflation in the next three to five years. This is much higher than the Fed's 2% goal.

At the March 19 FOMC meeting, rates held steady at 4.25% to 4.5%, a cautious stance that has worked so far. In 2025, we face challenges like tariffs, stubborn inflation, and rising global pressures. What I’m getting at is we are not out of the woods yet and even if inflation on paper is better it doesn’t necessarily “feel” better for the average American.