Economists, CEOs, and investment banks have warned for over a year now that the U.S. economy is headed for disaster, offering predictions ranging from doomsday scenarios like an economic “hurricane”—or even another “variant of a Great Depression”—to much milder, more “garden variety” outcomes.

But so far, despite persistently elevated inflation, rising interest rates and slowing consumer spending, a true recession has yet to appear. In December, the U.S. economy added 233,000 jobs, pushing the unemployment rate to pre-pandemic lows of 3.5%. Moody Analytics’ chief economist Mark Zandi said on Sunday that he believes the strong jobs report is evidence that a recession may not be so “inevitable” after all.

“The deeper I look into the bowels of last week’s job market data, the more I think we can skirt a recession,” the veteran economist wrote in a Sunday Twitter thread

Zandi noted that the unemployment rate remains near a “half-century low” and argued that the wage pressures that have helped exacerbate inflation in the U.S. over the past year are relenting.

Throughout 2022, the Fed has been on a mission to ensure a “soft landing” for the U.S. economy—where inflation is tamed without sparking a recession. The problem is that in order to reduce inflation, which reached a 40-year high of 9.1% in June, the central bank needs to cool the labor market. To do that, officials have embarked on the most aggressive interest rate hiking cycle in 40 years, leaving the stock market in shambles and the housing market ailing

But so far, the unemployment rate has actually dropped slightly from 3.6% to 3.5% since the Fed’s first rate hike in March 2022—and wages have been rising too rapidly for the central bank’s liking as well. 

In Fed Chair Jerome Powell’s Nov. 30 speech at the Hutchins Center on Fiscal and Monetary Policy in Washington, D.C., he made it clear that wage growth needs to come down sharply to fight inflation.

“Wage growth remains well above levels that would be consistent with 2% inflation over time. Despite some promising developments, we have a long way to go in restoring price stability,” he said.

But the latest jobs report revealed that average hourly earnings rose just 0.3% in December. That’s not exactly the sharp drop that Powell was looking for, but it’s a step in the right direction.

“Avg hourly earnings growth has definitively rolled over,” Moody’s Mark Zandi said of the data Sunday. “This wage measure has its measurement issues, and it is surely overstating the case, but it is making a strong case that workers are moderating their wage demands.”

Zandi believes that the U.S. economy could end up in a type of Goldilocks scenario where the unemployment rate remains low, but inflation still falls back to the Fed’s target rate. He said that businesses don’t want to lay off workers “outside of tech,” pointing to corporations’ recent issues in “finding and retaining” employees and low initial unemployment insurance claims as evidence, which means the labor market should remain strong.

But at the same time, wage growth should slow, because businesses have found new ways to reduce costs, Zandi said.

“They are pulling back on hiring…cutting workers’ hours, which are about as low as they’ve been in over a decade. And they are cutting their temp help workers,” he noted, arguing these actions have created “slack” in the labor market, which is “weighing on wage growth.” 

This mix of falling wage growth and sustained low levels of unemployment may allow U.S. inflation to fall without the need for a recession, according to the economist.

“Recession seems unlikely if wage growth and inflation subside without lots of layoffs. Layoffs seem a necessary condition for a downturn. It’s only when workers worry that they will lose their jobs that they panic, ramp up saving and slash spending, and the economy falters,” he wrote.

But Rick Rieder, BlackRock’s chief investment officer of Global Fixed Income, told Fortune on Friday that while the labor market is “softening,” he still believes that the unemployment rate will need to rise for inflation to drop back to the Fed’s 2% target rate. 

“We think durably lower levels of inflation would have to coincide with slower demand for employment (and consequently wages), before the FOMC would be ready to relent on tightening policy​​,” he said, referencing the Federal Open Market Committee that sets U.S. monetary policy.

Because of this, Rieder said that the Fed is “not ready” to stop hiking interest rates just yet, and he believes the path to a “soft landing” will be more difficult than most imagine.

“​​Creating balance and not overtightening, reducing inflation with blunt tools, which only impact parts of today’s modern economy, is in itself a balancing act that even the most decorated Olympian would envy,” he said. “Policymakers’ ability to stick this landing for the economy and markets is still very much up in the air.”

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