It is beginning to look as if Jay Powell and his colleagues at the US Federal Reserve have pulled off something few thought possible even a few months ago – engineer a “soft landing” for the world’s biggest economy without tipping it into recession.
In the middle of last year, that looked like a very tall order indeed.
The headline rate of inflation – the consumer price index (CPI) – had peaked at a 40-year high of 9.1% in June last year but was only coming down very slowly in the face of a concerted series of interest rate rises from the Fed.
Worse still, “core” inflation – the measure that strips out volatile elements such as energy, food, alcohol and tobacco – was still rising, suggesting that domestically generated inflation (as opposed to the externally generated inflation sparked by Russia’s invasion of Ukraine) was becoming entrenched.
Accordingly, the Fed carried on raising Fed funds, its main policy rate, aggressively.
From a range of 0.25% to 0.5% in March 2022, when the Fed began raising interest rates, Fed funds charged all the way up to the current range of 5.25% to 5.5% reached in July this year.
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The harsh medicine appears to have worked.
Tuesday brought news that CPI in the US fell from 3.7% in September to 3.2% in October while, crucially, the “core” measure fell from 4.1% in September to 4% in October – a level last seen in September 2021.
Even though the figures suggest US inflation is not quite back at the Fed’s 2% target rate, the readings have intensified hopes the central bank will not need to raise interest rates again from here, while even bringing forward the date when it may start to be able to begin easing monetary policy.
The markets are now pricing in US interest rate cuts as early as May next year.
US stocks accordingly threw a party on the news.
The S&P 500 – the most important US stock index – and the Nasdaq both enjoyed their best one-day gains on Tuesday since April with the S&P’s 1.9% rise taking its gains so far in November to 7.2%.
The Nasdaq, meanwhile, is up nearly 10% so far this month.
Perhaps the most striking increase was seen in the Russell 2000, the index of US small-cap stocks, which jumped by nearly 5.5% on the day.
A potential once in 80 year achievement
If the Fed has managed to achieve a soft landing, it will be a huge achievement.
The central bank has not managed to bring about a reduction in inflation of this magnitude, without pitching the US economy into recession, for 80 years.
The big question is whether President Biden will benefit from it at all.
The mood of the American public remains pretty sullen, with surveys suggesting more Americans still expect to be worse off in a year than those who expect their finances to improve.
The president’s disapproval ratings have been above 50% since inflation took hold early last year and remain high in spite of the fact that, for some months now, wages have been growing more rapidly than prices and unemployment remains at the extraordinarily low level of 3.9% – with US employers creating 204,000 jobs a month during the three months to the end of October.
It is something that has baffled commentators.
As the Wall Street Journal put it in a headline earlier this month: “The Economy Is Great. Why Are Americans in Such a Rotten Mood?”
A worse UK picture
That is something that will also concern Rishi Sunak and Jeremy Hunt as they celebrate today’s news that UK inflation, on the CPI measure, fell from 6.7% in September to 4.6% in October – its lowest level since October 2021 – while core inflation fell from 6.1% in September to 5.7% in October.
For the UK economy is in a markedly worse condition than that of the US.
Yes, there are some similarities.
Like the US, wages in the UK have been rising more rapidly than prices for the last three months while, again in common with the US, UK unemployment – at just 4.2% in the three months to the end of October – remains remarkably low by historic standards.
But there the comparisons end.
During the three months to the end of October, the US economy grew by a remarkable 4.9% year on year, with government spending, household spending and business investment all contributing to growth.
By contrast, the UK economy flatlined during the three months to the end of September, the latest quarter for which figures are available.
Why the UK is doing worse
The US government is also injecting an extraordinary amount of stimulus into the economy.
President Biden’s improbably named Inflation Reduction Act is injecting $369bn into the economy to support the energy transition and upgrades to infrastructure.
The Biden administration has also continued the Trump administration’s work in trying to bring jobs previously offshored back to America.
The UK government has no such options despite running a slightly lower budget deficit than the US.
The US, as it enjoys the world’s reserve currency in the dollar, can carry on borrowing without inflaming bond markets in a way the UK cannot – as was highlighted in the aftermath of Kwasi Kwarteng’s mini Budget in September 2022.
Moreover, where the UK government has been spending, it appears to be to no advantage.
This can be seen most markedly in the NHS where, despite a significant increase in resources and staffing, the number of patients being treated remains no higher than it was before the pandemic in 2019.
And the UK government’s flagship infrastructure project, HS2, has just been severely curtailed.
Nor is the UK attracting the levels of foreign investment that the US is.
It has even been overtaken by France as Europe’s prime destination for foreign direct investment.
The indifferent attitudes of investors towards the UK can be seen clearly in the UK’s stock market.
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The FTSE-100 trades on a price-earnings multiple (the standard investor yardstick) of just 9.87 times.
By contrast, the S&P 500 stands on a multiple of 24 and the CAC 40 in Paris stands on one of 13 times. Even the DAX 40 in recession-hit Germany stands at 11.6 times earnings.
Things are even worse in the case of the FTSE Mid 250, a better indicator of UK corporate health than the FTSE-100, whose constituents derive three-quarters of their earnings from overseas.
The FTSE-Mid 250 sits on a price earnings multiple of a laughably low 6.43 times.
Today’s data suggests that the Bank of England, like the Fed, is winning the battle against inflation.
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It has also brought down inflation without, to date, triggering a UK recession – something that even the Bank itself, this time last year, did not think possible.
If it does succeed in achieving a soft landing, though, the US experience suggests Mr Sunak will achieve no more credit than Mr Biden has.
