U.S. economy suddenly seems on track for fabled soft landing: 2% inflation without a recession

By Greg Robb

Who needs interest-rate cuts when the labor market is looking healthy and inflation is cooling?

The latest government data point to a solid labor market and inflation that has slowed since the summer.

After a year of navigating stormy geopolitical developments that kept businesses and consumers on edge, the U.S. economy is starting to look like it it could have a smooth descent to a soft landing.

A soft landing is the term used by economists for getting inflation down to the Federal Reserve's 2% annual target without putting the economy in a recession.

That hasn't happened since World War II. It took a famously gut-wrenching recession to wring out the last bout of high inflation from the economy in the late 1970s and early 1980s.

Economists note that there have been false hopes that were dashed before. Former Federal Reserve officials argued that the economy was on a track for a soft landing in late 2024, before President Trump was sworn into office and immediately announced swift government job cuts and plans for high tariffs on imported goods that U.S. manufacturers and businesses relied on.

"After this week's employment and inflation data, it is starting to look like the elusive soft landing may finally happen," said Harvard University economist Jason Furman, in a post on X.

The U.S. economy added 130,000 jobs in January and the unemployment rate dropped to 4.3%, a sign the fragile labor market is stabilizing.

Wall Street had expected a smaller gain of 55,000 new jobs, and the unemployment rate is now at its lowest since August. There had been fears that the labor market was on a slow climb to 5%.

On inflation, Ethan Harris, former chief economist at BofA Securities, said a stock market that fell on Friday seemed to be overlooking good news.

"All four major measures of CPI inflation - headline, core, trimmed mean, and median - have slowed a bit since the summer," Harris said in a column on LinkedIn.

Read: Key measure of inflation slows to 5-year low

"The broad theme suggested by the data is that activity ended 2025 like a lamb but came roaring back like a lion in 2026, whilst inflation remained as calm as a deer," said Bob Schwartz, senior economist at Oxford Economics, in a note to clients.

Mystery over whether weak labor market or strong growth would prevail

The big mystery over the past few months has been that the U.S. labor market has been weak even though the economy was growing at a 3% to 4% annual rate.

But the data this week suggest that growth is spilling into the labor market, said James Knightley, chief international economist at ING.

The six-month moving average of jobs growth is picking up, hinting that the worst of the hiring drought is behind us, he said in a note to clients.

"Expect more people to ask whether Fed rate cuts are needed at all. Soft landing and all that," he added.

Risks are still at hand

For many economists, talk of a soft landing seems akin to celebrating green shoots in the garden when below-freezing weather could return any day.

In the labor market, the improvement seen so far has come from one sector: healthcare.

And after the January inflation data, Adam Posen, president of the Peterson Institute for International Economics, doubled down on his forecast that inflation may hit 4% this year.

"I think we're going to end up with pretty high inflation and the Fed behind the curve," Posen said in an interview on Bloomberg TV.

-Greg Robb

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