Can the US economy dodge a recession with a 'soft landing?' Here's how that would work.

Economic optimism has been in short supply over the past year. Soaring inflation translated to sticker shock for many Americans from the gas pump to the grocery store. In order to get prices under control and keep the economy from spinning out, the Federal Reserve stepped in with a series of rate hikes meant to pump the breaks.

But, as hike after hike arrived, some economists began to worry the market would not slow gracefully, instead grinding to a screeching halt and plummeting into recession.

Those fears appeared slightly assuaged this month as inflation numbers continued to drop and the economy showed remarkable resiliency. Could a "soft landing" be in sight? Here's what we know.

What is a recession soft landing?

Despite plenty of forecasting, the US economy has not yet fallen into a recession. This would require a "significant decline in economic activity that is spread across the economy and lasts more than a few months," according to the National Bureau of Economic Research, the non-profit that calls recessions.

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For more than a year, the Fed has raised rates aggressively to wrestle down inflation but has slowed the pace recently as its key rate hit a 16-year high, partly in hopes of avoiding an outright downturn in the economy. The hope is to usher in a "soft landing," or a slowing of the economy without significant upticks in unemployment or economic contraction. Essentially, if the Fed is in the cockpit, a soft landing wouldn't jolt the American economy when it hits the tarmac.

Will the economy have a soft landing?

This week, Chair Jerome Powell will gather the Fed to decide on interest rate hikes, and all eyes are trained on the officials as they near the coveted "soft landing." The Fed is predicted to announce another rate hike, the 11th consecutive one since March of 2022.

Bill Adams, chief economist for Comerica Bank, told USA TODAY he expects a quarter of a percentage point hike, bringing the federal funds to a target range of 5.25% to 5.5%.

Investors seem less jumpy about a recession, however. This is likely due to healthy job numbers and consistently falling inflation along with steady consumer spending. Though a "soft landing" is not yet guaranteed, compared to previous projections banks seem to feel it is more in reach. “We have greater resiliency within the economy than I would have anticipated at this point in time, given the extent of rate increases we’ve gotten,” Matthew Luzzetti, Deutsche Bank’s chief U.S. economist said.

Some economists are warning it is not so simple, however. Robert Sockin, a global economist at Citi, told the Financial Times it would be “historically unusual” for central banks to get inflation to a target rate without “a meaningful loosening in labour market conditions”.

What does a soft landing mean for the market?

When inflation soars, a soft landing is the solution economists seek to get prices (and spending) back under control without tanking the market.

The Fed is attempting to bring core inflation down to 2%, no small feat after it peaked at 9.1% in June of 2022. Officials have consistently raised rates to up the cost of borrowing money. If this approach yields the results they had hoped for, the Fed may pause rate hikes for a second time in the next few months and enter a new phase: holding steady.

Rather than bring down rates and risk a yo-yo effect, rates will likely remain high as the economy continues to re-regulate towards a level of inflation consumers (plus investors and politicians) can be comfortable with.