The focus of monetary tightening in the United States is shifting from the end point of the benchmark interest rate to the duration of high interest rates. While the Federal Reserve is confident of a soft landing for inflation while avoiding a sharp deterioration in the economy, negative factors such as the strike in the auto industry and the high price of crude oil are mounting. An overly strong US economy risks excessive monetary tightening.

"We have been trying to achieve a soft landing and we think it is possible," Fed Chairman Jerome Powell said in a press conference after the Federal Open Market Committee (FOMC) meeting on September 20. The economic outlook released that day gave the impression that this view had also strengthened within FOMC members.

[b] A soft landing is possible

The real growth rate of the United States in October-December 2023 is expected to be 2.1 percent, which is significantly higher than the last forecast of 1.0 percent in June, and the growth rate in 2024 has also been revised higher. The unemployment rate forecast for October-December 2023 was lowered by 0.3 percentage points to 3.8 percent. The unemployment rate is also expected to remain at 4.1 percent in 2024-2025. The outlook is for a gradual decline in price growth to the targeted 2 percent without seriously damaging the economy and employment.

A year and a half since the Federal Reserve began raising interest rates, the US economy is accelerating rather than slumping. Excluding the more volatile categories, price growth is slowing and signs of overheating in the labor market are starting to ease. The reason is not a surge in unemployment, but a slowdown in hiring. It can be said that the soft landing of the US economy that Powell has been advocating is not a strong argument, but a realistic meaning.

Powell also noted that the success or failure of a soft landing "may depend on factors beyond our control." One of them is the strike at the auto giant.

The United Auto Workers union (UAW) has signaled that it will expand the scope of its strike against major auto companies starting this weekend as negotiations continue over wage increases. The current number of strikers is thought to account for about 10 percent of union members, and if the strike spreads and lasts for a long time, the impact on the U.S. economy will be huge.

Federal Reserve Chairman Jerome Powell (press conference after the Federal Open Market Committee meeting in Washington, September 20, 2016)

In the U.S. Congress, the timetable for passing a transitional budget by the end of the fiscal year in September is still unlikely due to opposition from hard-liners in the opposition Republican Party, which holds the majority in the House of Representatives. In addition to the direct drag on economic growth, there are concerns that the cessation of economic statistics will hamper policy judgment.

Libby Cantrill of Pimco, the US bond investment giant, said that "the shutdown could have a bigger impact than most people expect".

[b] concerns about excessive tightening

"The effect of monetary tightening has not yet fully manifested," Powell reiterated this view at the press conference. The purpose of his statement is that while quantitative tightening is still ongoing, it will take a long time for the effects to filter through to the real economy.

Powell believes that rate hikes are in the final stages and that "the risks of too much tightening and the risks of not enough tightening have reached equal proportions." He hinted that he would act cautiously to avoid overcooling the economy and stifling the seeds of a soft landing.

High interest rates in 2006-2007 led to the bursting of a growing housing bubble in the United States that led to the Lehman crisis in the fall of 2008. With the current increase in the burden of interest rates, the burden on the real economy and financial markets is steadily increasing.

According to data from S&P Global Ratings, the number of debt defaults by large companies around the world reached 16 in August, the highest since 2009, after the Lehman crisis.

Of these, the United States defaulted on its debt in nine cases, accounting for more than half. Financially weak companies such as Yellow Corporation, the US truck-logistics giant with huge debts, are in trouble.

U.S. commercial real estate, which faces huge refinancing in the coming years, is another area where there are big worries about weathering rising interest rates. The Fed's hoped-for soft landing remains a grim prospect.