- The Federal Reserve is holding interest rates steady, indicating the potential for a soft landing.
- A soft landing refers to smoothly bringing down inflation without triggering a recession or increasing unemployment.
- Soft landings are rare and challenging to achieve.
- The Fed raises interest rates to fight inflation, but it is a blunt instrument that can potentially harm the economy.
- The mid-1990s saw a successful soft landing, but the current economic challenges are different.
- The Fed has been attempting a soft landing after a period of high inflation, which is unprecedented.
- Soft landings require avoiding turbulence such as energy prices, a hot economy, rate hikes, and financial crises.
- The Fed itself is a threat to a soft landing if it holds rates too tight for too long.
- Inflation has cooled, prompting the Fed to keep interest rates steady, but it doesn't guarantee a soft landing.
- The Fed is in wait and see mode, not wanting to declare victory prematurely.
- The possibility of a recession or a lack of downturn could impact the outcome of a soft landing.
- Soft landings require a combination of luck and skill in setting interest rates.

Soft landing the U.S. economy is like an economic nirvana. Inflation is low and the job market is strong, but soft landings don’t happen often. The Federal Reserve’s goal is to bring inflation down to its target rate of 2% without triggering a negative reaction like a recession or raising the unemployment rate. 

WSJ’s Nick Timiraos explains why soft landings don’t happen often and how the Federal Reserve is trying to make one happen.

0:00 Is a soft landing coming?
0:26 Soft landing, explained
1:50 History of soft landings
2:46 What could go wrong
3:25 What’s next for the economy?

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#Inflation #Economy #WSJ

Inflation is dropping, and the Federal Reserve is holding interest rates steady, signaling the potential for A soft landing.

A soft landing is basically economic nirvana.

They require the right mix of policymaking skill and just plain economic luck.

But we don't see soft landings very often because they're hard to achieve.

Imagine inflation as an airplane descending to the ground.

When a soft landing occurs, that essentially means the plane or inflation manages to land smoothly on the ground without any bumps or turbulence, which basically means the Federal Reserve is able to bring inflation down to its target rate, which is about 2% without triggering a negative reaction like a recession or significantly raising the unemployment rate.

There's a little bit of a problem with the soft landing analogy.

It's growing, it's shrinking, it's not standing still.

So then the question is, if we have a soft landing, do you just stay there?

In order to soft land the economy, the Fed uses its main tool to fight inflation, raising interest rates.

And the Fed was, until recently, on a historic run of raising interest rates to a 22 year high after a post pandemic strong economic rebound pushed inflation to more than 9% last year.

At today's meeting, the committee raised the target range for the federal funds rate by a quarter percentage point, bringing the target range to 4 and 3 quarters to 5%.

When you raise interest rates, you know, it's a blunt instrument.

You don't get to fine tune how much you're going to slow down the economy.

It isn't like lightly tapping on the brake on the car.

You stomp on it and, You know, things can break.

The concern is that something in the economy is going to break.

The most commonly referred to example of a soft landing happened in the mid-1990s under the leadership of then Fed Chair Alan Greenspan.

The Fed raised interest rates rapidly between 1994 and 1995 from 3 percent to 6 percent.

Inflation and the unemployment rate both declined.

The data that have been published in the first weeks of 1995 have offered some indications that the expansion may finally be slowing from its tarred and unsustainable pace of late 1994.

But today's economic challenges are different.

Inflation was not a problem when the Fed was raising interest rates in the mid-1990s.

This is a completely different scenario because the Fed has been trying to do something that's never been done before, which is soft landing the economy after a period of much higher inflation.

Soft landings are elusive for a reason, because in order to land the airplane, you have to avoid a lot of turbulence like energy prices, a hot economy, Fed rate hikes and financial crises.

There are so many unknowns in the economy.

Are consumers suddenly gonna feel like they've gotten their fill of Taylor Swift and Beyonce and they don't need to spend money anymore?

They're not so confident about their income situation.

Jobs are maybe harder to get, and so they pull back.

1 of the primary threats to a soft landing?

If the Fed holds rates too tight for too long, it could risk a severe downturn.

Inflation has cooled to 3.1 percent and the unemployment rate dropped to 3.7 percent, prompting the Fed to keep interest rates steady.

I have always felt, since the beginning, that there was a possibility, because of the unusual situation, that the economy could cool off in a way that enabled inflation to come down without the kind of large job losses that have often been associated with high inflation and tightening cycles.

They think they've probably done enough, but they don't want to declare victory or mission accomplished prematurely.

It would be embarrassing and it could be painful for the economy if they said they were done and then they had to go raise interest rates again.

While the inflation rate, or the airplane, appears to be descending in the right direction, it doesn't necessarily mean the Fed has soft-landed the economy.

If we don't have a soft landing, it's probably because we have a recession.

And then the question is, how bad does it get?

The other side of that is that we don't have any kind of downturn.

And in that case, the Fed would probably get nervous if inflation didn't come down enough and the economy started to regain speed.

I think the reason soft landings are so difficult to achieve is they just require the right mix of luck and skill.

It's hard to know without seeing the future where exactly you should set interest rates.


Speaker 0: Inflation is dropping, and the Federal Reserve is holding interest rates steady, signaling the potential for A soft landing. Soft landing.

Speaker 1: Is this the soft landing? A soft landing is basically economic nirvana. They require the right mix of policymaking skill and just plain economic luck.

Speaker 0: But we don't see soft landings very often because they're hard to achieve. Here's why. Imagine inflation as an airplane descending to the ground. When a soft landing occurs, that essentially means the plane or inflation manages to land smoothly on the ground without any bumps or turbulence, which basically means the Federal Reserve is able to bring inflation down to its target rate, which is about 2% without triggering a negative reaction like a recession or significantly raising the unemployment rate.

Speaker 1: There's a little bit of a problem with the soft landing analogy. Planes land, economies don't. The economy is always moving. It's growing, it's shrinking, it's not standing still. So then the question is, if we have a soft landing, do you just stay there?

That's hard to do.

Speaker 0: In order to soft land the economy, the Fed uses its main tool to fight inflation, raising interest rates. And the Fed was, until recently, on a historic run of raising interest rates to a 22 year high after a post pandemic strong economic rebound pushed inflation to more than 9% last year.

Speaker 2: At today's meeting, the committee raised the target range for the federal funds rate by a quarter percentage point, bringing the target range to 4 and 3 quarters to 5%.

Speaker 1: When you raise interest rates, you know, it's a blunt instrument. You don't get to fine tune how much you're going to slow down the economy. It isn't like lightly tapping on the brake on the car. You stomp on it and, You know, things can break. The concern is that something in the economy is going to break.

Speaker 0: The most commonly referred to example of a soft landing happened in the mid-1990s under the leadership of then Fed Chair Alan Greenspan. The Fed raised interest rates rapidly between 1994 and 1995 from 3 percent to 6 percent. Inflation and the unemployment rate both declined.

Speaker 3: The data that have been published in the first weeks of 1995 have offered some indications that the expansion may finally be slowing from its tarred and unsustainable pace of late 1994.

Speaker 0: But today's economic challenges are different.

Speaker 1: Inflation was not a problem when the Fed was raising interest rates in the mid-1990s. They were doing a preemptive strike. This is a completely different scenario because the Fed has been trying to do something that's never been done before, which is soft landing the economy after a period of much higher inflation.

Speaker 0: Soft landings are elusive for a reason, because in order to land the airplane, you have to avoid a lot of turbulence like energy prices, a hot economy, Fed rate hikes and financial crises.

Speaker 1: There are so many unknowns in the economy. What's gonna happen to oil prices? Are consumers suddenly gonna feel like they've gotten their fill of Taylor Swift and Beyonce and they don't need to spend money anymore? They're not so confident about their income situation. Jobs are maybe harder to get, and so they pull back.

Speaker 0: 1 of the primary threats to a soft landing? The Fed itself. If the Fed holds rates too tight for too long, it could risk a severe downturn. Inflation has cooled to 3.1 percent and the unemployment rate dropped to 3.7 percent, prompting the Fed to keep interest rates steady.

Speaker 2: I have always felt, since the beginning, that there was a possibility, because of the unusual situation, that the economy could cool off in a way that enabled inflation to come down without the kind of large job losses that have often been associated with high inflation and tightening cycles.

Speaker 1: They're in wait and see mode. They think they've probably done enough, but they don't want to declare victory or mission accomplished prematurely. It would be embarrassing and it could be painful for the economy if they said they were done and then they had to go raise interest rates again.

Speaker 0: While the inflation rate, or the airplane, appears to be descending in the right direction, it doesn't necessarily mean the Fed has soft-landed the economy. A lot could change at any given time.

Speaker 1: If we don't have a soft landing, it's probably because we have a recession. And then the question is, how bad does it get? Is it a mild recession? The other side of that is that we don't have any kind of downturn. And in that case, the Fed would probably get nervous if inflation didn't come down enough and the economy started to regain speed.

I think the reason soft landings are so difficult to achieve is they just require the right mix of luck and skill. It's hard to know without seeing the future where exactly you should set interest rates.

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Why Soft Landing the Economy Is So Rare | WSJ