The Federal Reserve is on the verge of achieving that rarest of economic feats: A soft landing.
The rapid disinflation that the Fed has engineered over the past two years mirrors that of the 1990s—the last time the central bank achieved such a difficult feat.
That disinflation set the stage for a long period of productivity gains and low inflation, driven by technological advancement and open trade policies.
During that time, productivity increased by well above 2% a year, while disinflation, and in some cases outright deflation, kept import prices in check.
Read more of RSM’s insights on the economy and the middle market.
Now, improving labor productivity, advances in artificial intelligence and the Federal Reserve’s progress toward its 2% inflation target have all given rise to the prospect that a similar kind of sustained expansion can be replicated.
The potential gains are significant. The U.S., with services accounting for about two-thirds of total spending, could reap tremendous benefits from the widespread implementation of AI within the service sector. That adoption would almost certainly spill over into the tradables sector, setting the stage for an AI-driven boom.
But businesses, and the economy overall, face considerable uncertainty over the prospect of sharply higher tariffs.
Today’s tariffs are the opposite of the globalization trend in the 1990s, and they are threatening to undo the Fed’s efforts to curb inflation.
An increase in tariffs along the levels being discussed in Washington only raises the probability of rising goods inflation, which has been climbing in recent months.
The Fed would then face a difficult decision. Instead of returning to its neutral rate target by the end of 2027, the central bank would almost certainly have to hike its policy rate keep inflation at tolerable levels.
