I’ve heard that term a lot over the past 8 months. What would that even look like?
In: Economics
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).
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