I’ve heard that term a lot over the past 8 months. What would that even look like?
In: Economics
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In the United States, the Federal Reserve (the Fed) is tasked with trying to keep inflation low – around 2-3%. When inflation rises above that target, that means that the economy is moving too fast and too much money is going around buying things, causing prices to rise.
To slow this down the Fed can raise interest rates given to banks. This is a bit complicated in of itself, but overall it makes borrowing money more expensive which makes it harder for companies to grow. The goal is to slow down the economy so inflation reduces closer to the target inflation of 2-3%.
The problem with this, though, is that companies can go out of business if borrowing money suddenly becomes much more expensive, or their customers suddenly can’t afford to pay them because their customers can’t borrow money, or their customer’s customers. A company might not even go out of business but might be concerned about the economy cooling too much and lay off a lay of people to cut costs, which can have the effect of causing the very cooling the business was concerned about originally.
If this happens in a large scale that causes a recession. The economy shrinks and a lot of people lose their jobs, and it can take a lot of work to fix it and get the economy working again. That’s what’s known as a hard landing.
A soft landing, on the other hand, is the hope that inflation can be brought under control without causing a recession. Raising interest rates the right way so the economy slows down to the speed the Fed wants to maintain, but in a way that doesn’t cause the economy to slow so much that it starts to shrink instead.
It’s a very tricky goal, and in the past most of the time hasn’t been successful. There is hope that this time could be different, but only time will tell for sure.
Alright, it’s a huge system with a lot of momentum.. There’s lag. That means when they throttle up the engine, there’s a delay before the engines actually come on. It’s hard to control.
The Fed (or any other central bank that controls the fiat currency), has to match the supply of money to the economic activity. They print money and loan it out. If the economy is hot, people will take out a lot of loans. If the Fed gives out loans too cheaply, there’s too much money and inflation gets really high (which hurts the economy). Not enough money and people can’t do the business they want (or worse, deflation). They aim to keep a nice steady 3%.
When things are changing really quickly in the economy, like let’s say war, a pandemic, or vaccines sending everyone back to work, that lifts the economy up or down. Faster than the Fed can adjust the throttle. After vaccines put people back to work, the economy skyrocketed (compared to pandemic times). Inflation went up with it and the Fed clamped down on the supply of money.
If they clamp too hard, we hit deflation, business can’t do business, and it hurts the economy. If they don’t clamp hard enough, the high inflation continues and hurts the economy. A “soft landing” would mean they go back to near 3% quickly without crashing through.
It’s all a game of balance and the ball on their shoulders is the whole world.
The idea is that a soft landing is the opposite of crashing. Trying to reverse inflation risks a recession. A soft landing is trying to reel the economy back down without crashing.
Inflation that is too high can be harmful for the economy. Cost of living gets too high, supplies for businesses get too expensive, etc. That can be okay if wages are also rising, stocks are booming, companies keep growing, and so forth. But it’s ultimately not sustainable eventually leads to a recession.
The cure to this, from the perspective of the commanding heights of the economy and government, is to deliberately cool the economy down. If they make it more expensive for businesses and consumers to borrow money by raising interest rates, they will borrow less, leading to less activity. Less activity means less inflation.
However, the question is how much less activity is right to cure inflation? Pump the brakes too much and a slowdown turns into a recession or depression. Don’t pump the breaks enough and inflation remains out of control.
Somewhere in between is a sweet spot. If deciding to raise interest rates to fight a recession is like an airplane taking off, hitting that sweet spot would be the soft landing. As opposed to not landing at all (inflation stays high), or a hard landing (kaboom, recession).
The very simplified answer is that it means reducing inflation from high levels to acceptable levels (2-3%) WITHOUT causing a recession.
To expound a bit, this is the job of the US Federal Reserve (“The Fed”). The Fed has really one thing they control, which is “interest rates”. When they want to stimulate the economy, they lower interest rates, which means banks can get good deals on money via loans, and thus money becomes a bit more accessible overall.
But money becoming super accessible is part of what causes inflation. So, to help reduce inflation, the Fed *raises* interest rates. This makes money a bit less accessible, and tends to slow the economy down a bit. As you might have guessed, slowing down the economy too much leads to a recession, which is the “hard landing”.
It’s a very difficult balancing act to keep inflation at reasonable levels without accidentally causing a recession. Especially when inflation gets as high as it did these past few years, I’ve heard it compared to landing a smoking plane. From what I’ve heard though (I’m not an expert), Jerome Powell (the current chairman of the Fed) is actually doing a great job so far and may succeed in giving us a (mostly) “soft landing”.
It would look much like what we are having right now. Generally most economic downturns happen with a bang. As usual central banks raise rates to get inflation under control, but at some point, some systematically important failure happens and you have a rapid cascade of bankruptcies, necessitating need to open up the money taps again all in one go and bail everyone out. That hasn’t happened this time (yet). So presumably, central banks can reduce the rates again gradually until they are back to low level and we are in growth cycle again. That’s the soft landing that is the goal of every single central bank to achieve, might be this time it actually succeeds.
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