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