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Fed Seeks Economic Soft Landing, Rarely Seen in Wild: QuickTake

Alan Greenspan Photographer: Andrew Harrer/Bloomberg
Alan Greenspan Photographer: Andrew Harrer/Bloomberg (Bloomberg)

Federal Reserve Chair Jerome Powell and his colleagues are embarking on a delicate task: They’re trying to use higher interest rates to bring down sky-high inflation without crashing the U.S. into a recession. The ideal result would be what economists call “a soft landing.” Steering the U.S. economy toward one has been made immeasurably harder by Russia’s invasion of Ukraine and the aftershocks that’s triggered in global energy, commodity and financial markets.

1. What’s a soft landing?

In short, it describes the Fed’s main job these days: Slow the economy enough to curb demand and rein in decades-high inflation, but not so much as to trigger a contraction in gross domestic product and a rise in unemployment. Doing that takes a combination of smart policy making and luck.

2. Has the Fed ever accomplished this?

Arguably once, in 1994-1995. Under then-Chair Alan Greenspan, the central bank doubled interest rates to 6% and succeeded in slowing economic growth without killing it off. The tighter credit did have adverse consequences, though. It led to huge losses for bond market investors and contributed to the 1994 bankruptcy of Orange County, California. Mexico was also compelled to seek a bailout from the U.S. and the International Monetary Fund.

3. Has every other attempt been a failure?

Not quite. Alan Blinder, who was Fed vice chair for the 1994-95 soft landing, says the central bank has achieved some other “pretty soft” landings during the past half-century. One came in 2001, when Fed rate increases that began two years earlier brought about an exceedingly mild, eight-month downturn -- what Blinder calls a “recessionette.” Powell has suggested he thought that the Fed was on course for a soft landing in 2020, when the U.S. economy looked set to extend a record-long expansion after a series of rate moves. But then economic activity came to a halt due to the pandemic.

4. What are the Fed’s chances this time?

When the Fed’s first rate hike was announced on March 16, officials signaled six more increases in 2022 and Powell said the economy was “very strong and well positioned to handle tighter monetary policy.” Some former Fed officials think otherwise. Ex Fed Governor Lawrence Lindsey puts the odds of an economic downturn by the end of next year at above 50% -- triggered by a meltdown on Wall Street as the Fed raises the cost of credit. Former New York Fed President and Bloomberg Opinion columnist William Dudley writes that a hard landing of the economy is “virtually inevitable.” Perhaps the best the Fed can hope for, some economists say, is what’s known as a “growth recession.” That’s a situation where the economy expands more slowly than its roughly 1.5% to 2% long-term trend and unemployment ticks up, but an outright contraction is avoided.  

5. Why the gloom?

The skeptics argue that the Fed waited too long to address mounting price pressures by insisting for months that those inflationary forces would prove to be “transitory.” Now the Fed has to play catch-up and may feel compelled to jack up interest rates so much to combat inflation that it will inadvertently trigger a recession.

6. Why was the Fed slow off the mark?

It was partly by design. After years of falling short of its 2% inflation target, the Fed adopted a new monetary regime in August 2020 under which it forswore taking preemptive action against inflation. Instead, it promised not to lift rates from near zero until inflation had hit 2% -- and was poised to exceed that level moderately for some time – and the economy had returned to full employment. Now, with inflation well above the Fed’s objective -- and the labor market “at least” at maximum employment, by Powell’s own admission -- he’s catching flak from all sides. At a Senate Banking Committee hearing on March 3, Alabama Republican Richard Shelby and Nevada Democrat Catherine Cortez Masto pushed him to admit the Fed had flubbed it by not being quicker to tackle rising prices. In a rare admission for a Fed chair, Powell said that “hindsight says we should have moved earlier.”

7. What is Powell’s strategy now?

He’s betting that a judicious tightening of monetary policy, combined with an easing of supply-chain bottlenecks and the winding down of the federal government’s pandemic-relief programs, will help rein in inflation without upending the economic expansion. With the financial implications of Russia’s attack on Ukraine “highly uncertain,” Powell & Co. kicked off the tightening campaign with a quarter percentage rate rise in March. But they’ve signaled since then that they’re prepared to be more aggressive, with a half-point hike on the table in May and more to come.

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