The Federal Reserve may be on the brink of orchestrating a so-called soft landing —bringing inflation down to the Fed’s annual target of 2% without meaningful economic pain or spiking unemployment. Markets love the idea and have been rising in anticipation of the Fed pulling it off.

Soft landings are tough to orchestrate. And if it does happen, it would be even more remarkable given the unprecedented starting point. Traditional economic models had no road map for the Covid pandemic and its economic aftershocks. The Fed’s rate hikes from 2022 to 2023—pushing up the federal-funds rate by about five percentage points from close to zero—have scant precedent in modern times.

While it’s too soon for the Fed to take a victory lap, economists are starting to lay out theories, several of which were discussed at the Fed’s Jackson Hole Monetary Policy Symposium. The subject of this year’s conference, held from Aug. 22-24, was “Reassessing the Effectiveness and Transmission of Monetary Policy.”

One clue comes from a paper that looks at the relationship between unemployment and inflation during the past four years. It explores how the U.S. economy was able to buck recession predictions as the postpandemic inflation spike receded.

In the paper, “Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge,” the researchers found that “inflation can be reduced without a significant drop in output,” and that “instead, it is labor market tightness that decreases.”

Traditional economic models suggest that shouldn’t be so easy. The Phillips curve, for instance, plots an inverse relationship between inflation and unemployment—when unemployment falls, inflation tends to rise, and vice versa. The Beveridge Curve charts an inverse relationship between job vacancies and unemployment: as the number of job vacancies increases, the unemployment rate typically decreases, and vice versa.

The initial rebound from pandemic closures was a period of extreme labor-market tightness with employers hard pressed to find staff and forced to boost wages, which contributed to services inflation. The ratio of unfilled positions to unemployed workers in the U.S. peaked at more than 2-to-1 in 2022. Annual inflation, as measured by the Consumer Price Index, hit 9% that June.

Economists debated how much softening in the labor market would be required to bring inflation back down to 2%. A relatively flat Phillips curve would imply a costly trade-off. The authors of the paper argue that the curve is steeper, or more sharply upward sloping, especially when the ratio of vacancies to unemployed workers was as high as it was in 2022.

They show that the recent softening in the labor market that helped to reduce inflation came from employers pulling back on their hiring intentions and reducing vacancies, rather than layoffs, which would have caused the unemployment rate to rise more.

Eventually, however, further softening in the job market will begin to come out of employment. The Fed is eager to get ahead of that by lowering rates sooner rather than later.

The Fed doesn’t just manage the economy through setting rates. It also transmits policy through messaging—signaling its intentions and convincing the bond markets, businesses, and consumers that its monetary policies are credible. Public perception, in other words, may be just as important as every quarter-point hike or cut.

Fed Chair Jerome Powell does most of that messaging, but according to another paper presented in Jackson Hole, until around March 2022, perceptions of the Fed’s inflation response were relatively muted.

In the paper, “Changing Perceptions and Post-Pandemic Monetary Policy,” the researchers analyzed market pricing, survey-based data, and economists’ forecasts to judge how the public expected the Fed to adjust policy. One conclusion is that it took the Fed beginning to increase its federal-funds rate target from near zero in March 2022 to boost the public’s perception of policymakers’ commitment to combating inflation. Inflation data also prompted a larger response in Treasury yields and interest-rate futures after rate liftoff.

Essentially, the Fed had to walk the walk before the public believed in the central bank’s inflation-fighting credibility.