What ‘deferred landing’ economic forecasts mean for your investments

A recession that was in the forecast for 2023 never came to fruition.

That has led to optimism that the Federal Reserve can reduce inflation and slow the economy without a recession, in what is called a “soft landing.”

But inflation may remain higher than the central bank’s 2% target for some time, which means the economy instead may be headed for a “deferred landing,” according to Roger Aliaga-Diaz, global head of portfolio construction and chief economist for the Americas at Vanguard.

“If the economy remains strong, that could mean that inflation actually does not come back down as quickly as we thought,” Aliaga-Diaz said.

Vanguard no longer has a recession as a baseline for 2024, according to its latest forecast, though it projects a soft landing could still happen. The firm has also revised its forecast for stronger U.S. gross domestic product growth — from 0.5% to 2% — and lowered its projections for year-end unemployment — from 4.8% to 4%.

At the same time, it bumped up its 2024 forecast for core inflation — defined as price growth excluding food and energy — from 2.3% to 2.6%.

The Federal Reserve will remain “cautious,” Vanguard predicts, and that could mean it maintains its target rate near the current 5.25% to 5.5% range.

How consumers feel about the prolonged fight to bring inflation down will depend on their personal inflation rate — the basket of goods and services a particular family spends money on, Aliaga-Diaz said.

If their spending is disproportionately focused on categories that are seeing higher rates of price growth — such as education or health care, for example — they will feel the effects of higher prices more acutely, he said.

“The average inflation rate masks a lot of variation, and you can see very different experiences there,” Aliaga-Diaz said.