"‘New Federal Reserve News Agency’: The U.S. economy is approaching a ‘soft landing’ moment, but it is too early to declare victory."

Nick Timiraos, a reporter for The Wall Street Journal dubbed the "new Fed newsroom" by the market, pointed out that multiple key indicators of the U.S. economy are improving at the same time: inflation is cooling, employment remains resilient, and growth is still steady. The "soft landing" is becoming unprecedentedly close, but there is still a gap before a final conclusion can be made.

The latest data strengthens the narrative of "disinflation without recession." The inflation report released on Friday shows that the core price index excluding food and energy rose 2.5% year-on-year in January, the lowest level since inflation began rising in 2021. Another report released on Wednesday showed that the January unemployment rate fell to 4.3%, with 130,000 new jobs added, exceeding expectations.

However, "pretty" data does not mean the mission is accomplished. Core inflation remains close to 3%, higher than the low of 2.6% reached last April, and Nick Timiraos notes that multiple analysts expect that after tariff increases are passed on from ports to stores, the downward trend in inflation may slow this year, or even stall above the 2% target.

The next steps for policy and markets are also more sensitive. Powell's term ends in May, and if the economy remains strong, the White House may push for rate cuts. Trump’s proposed successor, Waller, may choose to "consolidate gains" or "cut rates in pursuit of grander goals," potentially reshaping future policy paths.

Inflation's Decline Is More Like a 'Snapshot'; 2% Target Still Not Achieved

Timiraos wrote that the latest core inflation reading was affected in part by a data gap caused by last fall's government shutdown, with "technical suppression" factors, but it still shows that the price pressures which disrupted disinflation narratives over the past three years did not reappear at the start of this year.

Meanwhile, the structure of inflation is still not easy. The report shows that housing costs, previously the biggest driver of inflation, have clearly cooled, but prices for services outside housing remain stubborn and goods sensitive to tariffs are accelerating.

Excluding used cars, core goods prices rose at an annualized rate of 4.4% in January, the fastest growth in three years. Analysts believe this suggests that, after automakers absorb tariff costs in 2025, they are starting to pass more costs onto consumers.

Fed officials' concerns have shifted from "re-acceleration" to "remaining at high levels." Philadelphia Fed President Anna Paulson said in an interview last month that she will not declare victory in the "soft landing": "Inflation needs to get to 2%, we're not done yet." She predicts the monthly inflation reading will align with 2% by year-end.

Employment Isn't Bad, But Revised 'Slow Expansion' Reveals Vulnerability

The job market remains superficially stable, but underlying momentum is weakening. Annual revisions show that average monthly job gains for 2025 are only about 15,000, lower than almost every year since WWII except recession years, with new positions highly concentrated in healthcare and education.

Jeffrey Cleveland, chief economist at Payden & Rygel, said, "The worst-case scenario everyone expected did not happen," but he also thinks the labor market is "objectively weak" and unemployment is more likely to rise than fall this year.

The reason the unemployment rate remained stable during the reporting period is largely because companies neither hired aggressively nor laid off in large numbers, but this "fragile equilibrium" is not solid.

Nick Timiraos notes that potential triggers include companies whose stock prices have sharply pulled back after AI reshaped the industry landscape, possibly cutting costs through layoffs.

Strong Consumption Is Both a Support And an Obstacle to Inflation's 'Last Mile'

Nick Timiraos pointed out that besides employment, another key risk comes from asset prices and consumption. Household wealth has been boosted by years of rising stock markets, but if sustained sell-offs occur, consumers may cut back spending, weakening the growth engine.

However, some believe that the greater risk to a soft landing comes from overly strong consumption, which keeps inflation stuck above 2%.

Marc Giannoni, chief U.S. economist at Barclays, said he finds the "soft landing" somewhat concerning because household finances are broadly good, "wealth has risen almost across the board." He expects unemployment to fall to 4% this year, and inflation to stay around 2.8%, a "mirror image" of Cleveland's prediction.

Giannoni also said that the narrative that the "K-shaped economy" allows wealthier households' spending to mask the vulnerability of lower-income groups is exaggerated. It's good news for economic expansion, but not for inflation returning to 2%.

Tariffs and Fiscal Variables Combine; Fed Transition Amplifies Policy Uncertainty

Whether inflation can keep falling depends also on supply-side and policy-side variables. Nick Timiraos noted that several analysts expect that tariff-related price increases will gradually pass through the supply chain, limiting room for improvement in inflation this year.

Daleep Singh, chief global economist at PGIM Fixed Income, noted that AI-related capital spending contributed nearly one percentage point to economic output last year and may provide similar support again this year.

Singh also mentioned that before this autumn’s midterm elections, the Trump administration is motivated to adopt more expansionary fiscal policies and be more cautious in trade actions, since the large tariff hikes last April increased pressure on living costs. He expects year-end inflation at about 3%.

With such a mix of growth and inflation, the "last stretch" of monetary policy may be harder to traverse. Though a soft landing is nearer than previously expected, it isn't "locked in"; when the economy remains strong, the White House’s desire for rate cuts and the Fed’s commitment to the inflation target may become the core variables for market repricing.

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