A soft landing, in economics, is a cyclical slowdown in economic growth that avoids a recession. A soft landing is a goal for central banks when they seek to raise interest rates enough to halt an overheating economy and avoid high inflation, without causing a sharp decline. A soft landing may also refer to a gradual and relatively painful slowdown in a specific industry or economic sector.
Key Data Insights
A soft landing refers to a moderate economic slowdown that follows a period of growth. The Federal Reserve and other central banks aim for a soft landing when they raise interest rates to curb inflation. The Fed has a mixed record of achieving soft landings during past interest rate hike cycles. The likelihood of a soft landing is diminished due to the lags associated with monetary policy.
Understanding the Soft Landing
While airline passengers may take a soft landing for granted these days, past interest rate hikes by the Fed do not have the same track record. The term “soft landing” gained popularity during the tenure of former Federal Reserve Chairman Alan Greenspan, who is widely regarded as having engineered one in 1994 and 1995. Federal Reserve Chairman Jerome Powell has also noted that the Fed achieved soft landings in 1965 and 1984 and was on track for another in 2020 before the COVID-19 pandemic intervened.
In contrast, the last five recessions followed periods when inflation topped 5%: in 1970, 1974, 1980, 1990, and 2008. Inflation rose above 5% in 2022, and given the definition of a recession (negative GDP growth for two consecutive quarters), which occurred after the first and second quarters of 2022, the economy was in recession; however, the third quarter saw GDP growth.
To combat this inflation, the Fed raised interest rates over the year, leading to falling inflation alongside economic growth in the third quarter.
Special Considerations
The Fed’s record on soft landings is mixed at best, as the central bank does not exercise nearly the same control over the economy’s trajectory as a pilot does over an airplane. The Fed’s primary policy tools – interest rates and asset holdings – are blunt instruments that are not designed to address supply chain disruptions or pandemics.
In another transportation-related analogy, former Federal Reserve Chairman Ben Bernanke once remarked that “if monetary policy is like driving a car, the car is a vehicle with an unreliable speedometer, a foggy windshield, and tends to respond unpredictably and with a delay to the brakes or the gas.” Nothing that has happened since then has made the Fed’s job seem any easier.
What is a Soft Landing vs. a Hard Landing in Economics?
A country’s central bank adjusts interest rates to manage the economy. If inflation is too high, the central bank will raise interest rates with the aim of slowing spending. If the central bank raises interest rates too aggressively or too early, it will result in a hard landing. If the central bank raises interest rates slowly or by a small amount, this constitutes a soft landing. There is a fine line between the two and how interest rate increases affect the economy. The central bank does not want a hard landing because it can have severe negative repercussions.
What are the Main Causes of Inflation?
The main causes of inflation are demand-pull inflation (when the demand for goods and services exceeds the supply to meet that demand), cost-push inflation (rising prices due to increases in the cost of raw materials and labor), an increase in the money supply, rising wages, and the devaluation of the nation’s currency.
What
What are the components of monetary policy?
The central bank has three main tools to control its monetary policy. These are controlling bank reserve requirements, adjusting the discount rate (the interest rate imposed on financial institutions when borrowing from the central bank), and open market operations (buying and selling securities).
Summary
The central bank’s attempts to achieve a soft landing are complicated by the lags observed by Bernanke and others. Since the economy takes time to respond to changes in monetary policy, the central bank must define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and determine and define and define and determine and define and determine and define and determine and define and determine and define and define and determine and define and determine and define and define and determine and define and determine and define and determine and define and determine and define and define and define and determine and define and determine and define and determine and define and determine and define and define and determine and define and determine and define and define and determine and define and determine and define and determine and define and determine and define and define and define and determine and define and determine and define and determine and define and define and define and determine and define and determine and define and define and determine and define and determine and define and define and determine and define and determine and define and define and define and determine and define and determine and define and define and define and define and determine and define and determine and define and define and determine and define and determine and define and define and determine and define and define and define and define and define and determine and define and determine and define and define and determine and define and define and define and define and determine and define and determine and define and define and define and determine and define and define and define and determine and define and determine and define and define and define and define and define and define and define and define and define and determine and define and determine and define.
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