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3 scenarios for what could come next when new inflation numbers are released tomorrow


The last few years have been a wild ride for the U.S. economy, a pandemic, supply chain disruptions, stimulus checks and, yes, inflation. Yearly inflation did come down from a high of 9% last summer to a more manageable 3% last month. With new inflation numbers coming out tomorrow, Keith Romer from our Planet Money podcast walks us through three possible scenarios for what could happen next.

KEITH ROMER, BYLINE: Over the last year in change, the Federal Reserve has raised the federal funds rate from a quarter of a percent to 5.5%. That translates to higher rates for businesses and consumers that want to borrow, which, the idea goes, will cool down the economy and hopefully tame inflation. But economists agree this process is not an exact science, which makes it hard to know for sure how things will go. One possibility? - what's called a hard landing. If the Fed is too aggressive, it could bring down inflation but at a cost.

TORSTEN SLOK: I fall in the camp of a recession is coming. And the recession that's coming is most likely to be something that's associated with the unemployment rate going up. But that could, in this context, be described as hard landing.

ROMER: Torsten Slok is chief economist at Apollo Global Management. He says one challenge facing the Fed is how hard it is to know how long higher rates will take to actually change things.

SLOK: The key question is, what are the delayed effects of having raised interest rates so much?

ROMER: If rates are too high today, the Fed might not realize it until a year from now when a recession or a big jump in unemployment finally arrives. Louise Sheiner, an economist at the Brookings Institution, sees more reasons for optimism.

LOUISE SHEINER: Inflation's been coming down. All the conditions seem better - less inflation, more resilient economy and continued low unemployment rate even while prices are coming down. So all those things look pretty good.

ROMER: So good that Sheiner thinks the Fed might be able to pull off possible outcome No. 2, what many consider the holy grail of monetary policy, a soft landing.

SHEINER: So growth slows, never goes negative. The unemployment rate either doesn't increase or increases just a little. That's, like, what we want. That would be fantastic.

ROMER: Of course, there is a third possibility besides a hard landing or a soft landing, no landing, where inflation stays elevated.

JASON FURMAN: Yeah, I think there's more than a 50% chance that we're in the no landing scenario.

ROMER: Jason Furman, former economics adviser to the Obama administration, thinks the Fed might not have been aggressive enough.

FURMAN: Today's inflation is a function of yesterday's inflation and the day before's inflation. And that process has a very high degree of persistence.

ROMER: Furman does think inflation will come down eventually.

FURMAN: At some point, I agree there will either be a hard landing or a soft landing. But if that happens four years from now, I don't think the people who currently are talking about either of those scenarios will be particularly vindicated.

ROMER: The one thing all three economists agree on? Over the next year, any one of those three scenarios could still play out, hard landing, soft landing or no landing. Predicting the future of the economy is a tricky business.

Keith Romer, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Keith Romer has been a contributing reporter for Planet Money since 2015. He has reported stories on risk-pooling among poker players, whether it's legal to write a spin-off of the children's book Goodnight Moon and the time one man cornered the American market in onions. Sometimes on the show, he sings.