• Hard landing. This is not necessarily a recession, but at a minimum a monetary policy-induced slowdown that cools off the labor market and tempers consumer spending and the exuberance of financial markets. As demand slows, wages and prices ease to levels consistent with the Federal Reserve’s 2% target.

• Soft landing. The “painless disinflation” promise really does materialize in this scenario. Monetary policy doesn’t overly restrict the economy, which remains resilient at trend growth pace, yet inflation declines sustainably to 2%. This is the Fed’s projected path for 2025.

• Productivity boom. This is a second—and more realistic—way for inflation to fall without monetary policy producing an economic slowdown, something we saw in the 1990s and to some extent last year. In 2025, breakthroughs in generative artificial intelligence (AI) technology, and the significant capital investments associated with it, could give an early jolt to labor productivity, which would in turn boost supply-driven economic growth. 

Economic logic dictates that a hard landing is the most likely way for monetary policy to bring down inflation. A supply-side productivity jolt could also do so, but there is an element of luck in the timing of an AI boom. Whether generative AI is ready to deliver tangible productivity gains next year is far from assured. But then, no one predicted in real time the acceleration in productivity growth in the mid-1990s.

A soft landing remains the most difficult scenario to explain with straightforward economic logic, and, for this business cycle, it’s probably the least likely of the three.