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