Will the US Avoid a Recession? Yellen and Bernanke Both Say "Soft Landing Possible"

Yellen "Current Indicators Show Strong Employment and Inflation Decline"
Bernanke "Building the Best Soft Landing Scenario"

U.S. Treasury Secretary Janet Yellen and former Federal Reserve (Fed) Chairman Ben Bernanke have assessed that the U.S. economy is on a soft landing path. While U.S. inflation continues to ease toward the Fed's 2% target, concerns about the labor market remain within a manageable range.

In an interview with CNBC on the 26th (local time), Secretary Yellen said, "I have long believed that there is a path to a soft landing where inflation can be lowered while maintaining a strong labor market," adding, "Current indicators suggest that this is happening."

Former Chairman Bernanke also indicated that the U.S. economy is on a soft landing trajectory. At an event hosted by Fidelity Investments that day, he stated, "The best soft landing scenario has been built where jobs, inflation, and interest rates return to normal."

The U.S. economy continues to show solid growth based on robust consumer spending. The final figure for the second quarter real Gross Domestic Product (GDP) growth rate, released by the U.S. Department of Commerce that morning, recorded an annualized 3% increase compared to the previous quarter. This far exceeds the U.S. potential growth rate, estimated to be in the high 1% range, raising expectations for a soft landing of the U.S. economy. Contrary to concerns that household consumption would decline, strong consumer spending was the driving force behind the 3% growth. The first quarter growth rate was also revised upward by 0.2 percentage points from the previously announced 1.4% to 1.6%.

The key issue is the direction of the labor market, which has recently shown signs of cooling. The U.S. unemployment rate rose from the 3% range in the first half of the year to the 4% range in the second half.

Former Chairman Bernanke warned that the unemployment rate could rise due to the employment cooling that the Fed is concerned about. He said, "We have not yet seen such an increase in unemployment, but if the economy begins to slow down, that could happen," adding, "If people lose confidence or start relying on new government policies, it is certainly possible." He emphasized that in such cases, "the Fed will need to respond."

Secretary Yellen stressed that although the job market has cooled with the rise in unemployment, it is still low by historical standards. She also mentioned that inflation has dropped significantly. The U.S. Consumer Price Index (CPI) inflation rate fell from a peak of 9.1% in 2022 to 2.5% in August this year.

Secretary Yellen said, "I hope the Fed will support the continued strength of the labor market while inflation has also dropped significantly, and that this becomes the main scenario." While the pace of inflation slowdown has entered its final stage and is slowing, and the decline in housing costs?which is a stumbling block?is also slow, she expects housing costs to fall further as rents decrease.

She also predicted, based on recent remarks by Fed officials, that the U.S. benchmark interest rate will fall further to a neutral rate level following last week's 'big cut' (a 0.5 percentage point rate cut). The neutral rate is a theoretical interest rate level at which the economy can achieve potential growth without overheating or recession.

Additionally, she emphasized the necessity of reducing the fiscal deficit to keep the cost of government debt manageable.

Regarding U.S.-China relations, Secretary Yellen assessed, "We are cooperating in essential areas," and said, "Relations with China have become closer, and constructive ways to discuss differences have been found."