What is the probability of achieving a soft landing in 2026 after the recent rate cuts? Provide a chain of thought.
Chain of Thought As of December 23, 2025, the Federal Reserve has implemented several rate cuts starting in late 2024, with the most recent 25bps cut in December 2025 bringing the federal funds rate to 3.50%–3.75%. This follows a tightening cycle that peaked earlier, and the cuts reflect a shift toward normalizing policy amid cooling inflation and a resilient but moderating labor market.
A soft landing means the economy avoids a recession (positive GDP growth, low unemployment) while inflation returns toward the Fed's 2% target without significant economic contraction.
Current indicators are supportive:
- Atlanta Fed GDPNow estimates ~3.0% annualized growth for Q4 2025, indicating ongoing expansion.
- The Fed's December 2025 dot plot projects GDP growth of ~2.3% for 2026, unemployment steady at ~4.4%, and core PCE inflation easing to ~2.5%.
- Major institutions (Goldman Sachs, Morgan Stanley, RSM) forecast 2026 GDP in the 2.0%–2.5% range, with reacceleration possible from fiscal tailwinds, AI investment, and easing financial conditions.
Risks include persistent inflation (potentially pushed higher by tariffs or policy shifts), labor market softening, and policy uncertainty. However, baseline forecasts from Wall Street and the Fed lean toward moderated but positive growth.
Explicit recession probabilities for 2026 are low in late-2025 assessments:
- J.P. Morgan Global Research estimates a 35% probability of U.S. recession in 2026 (implying ~65% soft landing or better).
- Other sources (e.g., Goldman Sachs updates post-trade adjustments) suggest even lower odds, with many viewing recession as a downside tail risk rather than baseline.
- Market pricing and Fed projections imply limited further cuts (median one in 2026), consistent with a neutral stance supporting growth without aggressive easing needed for recession.
Historically, post-tightening cuts have ~60-70% recession odds, but current cuts appear more "insurance/normalization" oriented, similar to successful soft landings (e.g., 1995, 2019). Strong consumer balance sheets, AI-driven capex, and potential fiscal support bolster the outlook.
Consensus aggregates to a 60-70% probability of soft landing in 2026 (no recession, inflation moderating toward target, growth ~2%+). This is higher than historical averages post-cut cycles due to resilient data and proactive policy.
Conclusion The probability of achieving a soft landing in 2026 is approximately 65% (range 60-70% across sources). The economy shows resilience with solid near-term growth, easing inflation pressures, and supportive monetary/fiscal conditions. While downside risks (e.g., policy-induced inflation or labor weakness) exist, the baseline outlook from the Fed, Goldman Sachs, J.P. Morgan, and others favors moderated expansion without recession—validating the ongoing "soft landing" narrative into 2026. Investors should monitor labor data and inflation closely, as deviations could shift odds. |
