America seemed headed for an economic fairy-tale ending in late 2023. The painfully rapid inflation that had kicked off in 2021 appeared to be cooling in earnest, and economic growth had begun to gradually moderate after a series of Federal Reserve interest rate increases.
But 2024 has brought a spate of surprises: The economy is expanding rapidly, job gains are unexpectedly strong and progress on inflation shows signs of stalling. That could add up to a very different conclusion.
Instead of the “soft landing” that many economists thought was underway — a situation in which inflation slows as growth gently calms without a painful recession — analysts are increasingly wary that America’s economy is not landing at all. Rather than settling down, the economy appears to be booming as prices continue to climb more quickly than usual.
A “no landing” outcome might feel pretty good to the typical American household. Inflation is nowhere near as high as it was at its peak in 2022, wages are climbing and jobs are plentiful. But it would cause problems for the Federal Reserve, which has been determined to wrestle price increases back to their 2 percent target, a slow and steady pace that the Fed thinks is consistent with price stability. Policymakers raised interest rates sharply in 2022 and 2023, pushing them to a two-decade high in an attempt to weigh on growth and inflation.
If inflation gets stuck at an elevated level for months on end, it could prod Fed officials to hold rates high for longer in an effort to cool the economy and ensure that prices come fully under control.
“Persistent buoyancy in inflation numbers” probably “does give Fed officials pause that maybe the economy is running too hot right now for rate cuts,” said Kathy Bostjancic, chief economist at Nationwide. “Right now, we’re not even seeing a ‘soft landing’ — we’re seeing a ‘no landing.’”
On Wednesday, Fed policymakers received a fresh sign that the economy may not be landing quite as smoothly as hoped. A key inflation report showed that prices picked up more than expected in March.
The Consumer Price Index measure hovered at 3.8 percent on an annual basis after food and fuel costs were stripped out. After months of coming down steadily, that inflation gauge has lingered just under 4 percent since December.
While the Fed officially targets a separate measure of inflation, the Personal Consumption Expenditures index, the fresh report was a clear sign that price increases remain stubborn. Days earlier, the March jobs report showed that employers added 303,000 workers, more than expected, as wage growth stayed strong.
The combination of strong growth and sticky inflation might say something about the state of the U.S. economy, which at any given moment can be in one of four situations, said Neil Dutta, head of economics at Renaissance Macro, a research firm.
The economy can be in a recession, when growth falls and eventually pulls inflation lower. It can be in stagflation, when growth falls but inflation remains high. It can be in a soft landing, with cooling growth and inflation. Or it can experience an inflationary boom, when growth is strong and prices rise quickly.
At the end of 2023, the economy appeared to be headed for a benign slowdown. But these days, the data are less moderate — and more full of momentum.
“You had a lot of chips placed into the soft landing bucket, and steadily that’s been eroding and probability of an inflationary boom has come back,” Mr. Dutta said. “That kind of reinforced the Fed’s framing, which is that we have time before we have to decide about cutting rates.”
Fed officials entered 2024 predicting three rate cuts before the end of the year, which would have lowered borrowing costs to about 4.6 percent from their current 5.3 percent. The officials maintained that call in their March economic projections.
But as inflation and the economy overall show staying power, investors have steadily dialed back how many rate cuts they are expecting. Market pricing suggests that traders are now betting heavily on just one or two rate cuts this year. Markets also expect fewer cuts in 2025 than they previously anticipated.
Fed policymakers have taken an increasingly cautious tone when they talk about when and how much they might lower borrowing costs.
Jerome H. Powell, the Fed chair, has repeatedly emphasized that strong growth gives central bankers the ability to be patient about cutting interest rates. In an economy with so much oomph, there is less of a risk that keeping borrowing costs high for a while will tip America into a recession.
Some of his colleagues have been even more wary. Neel Kashkari, the president of the Minneapolis Fed, has suggested that he could see a scenario in which the Fed does not cut rates at all in 2024. Mr. Kashkari does not vote on interest rates this year, but he does sit at the policymaking table.
Fed policy drives the cost of borrowing across the economy, so that would be bad news for households hoping for mortgage or credit card rates to come down. And it could pose a political problem for President Biden ahead of the 2024 election if pricey borrowing costs leave voters feeling worse about the housing market and economy.
Mr. Biden said on Wednesday that he stood by his prediction that the Fed would lower interest rates this year — an unusual comment from a president who usually avoids talking about Fed policy out of respect for the central bank’s independence from the White House.
“This may delay it a month or so — I’m not sure of that,” Mr. Biden said.
Many Fed watchers think today’s high rates could persist for considerably longer. Many economists and investors previously expected rate cuts to start in June or July. After this week’s inflation report, investors increasingly see rate cuts starting in September or later.
Blerina Uruci, chief U.S. economist at T. Rowe Price, noted that the longer inflation flatlined, the more it could delay rate cuts: Officials are likely to want to see compelling evidence that progress toward cooler inflation has resumed before cutting borrowing costs.
And as the possibility that the economy is not really landing looms, some economists and officials suggest that the Fed’s next move may even be a rate increase — not a reduction. Michelle Bowman, a Fed governor, has said she continues to see a risk that “we may need to increase the policy rate further should progress on inflation stall or even reverse.”
Ms. Bostjancic thinks further rate increases are unlikely at this point: Most Fed officials are still talking about cuts. Still, the recent data suggest that it may take a long period of steady borrowing costs for the economy to simmer down and for progress toward lower inflation to restart.
“More likely, they’re just going to keep rates at this level for longer,” she said.