What is a soft landing?

The idea of a soft landing has become something of a north star for Jerome Powell and his colleagues at the Federal Reserve Bank, the institution charged with steering the US, and, by association, the global economy, through the current inflationary jam, but what exactly is a soft landing and what does it look like? 

A soft landing is a term used by economists to describe a scenario where an economy slows down gradually instead of experiencing a sharp recession, the general benchmark of a recession being a decrease in a country’s gross domestic product (GPD) for two consecutive quarters or more. The slowdown in this context is sparked when central banks raise interest rates to control inflation and prevent an economy from overheating and driving further inflation. A soft landing is bringing inflation under control without causing a recession. 

How does the Federal Reserve cause a soft landing?

When the interest rate is high, it becomes more expensive for businesses and consumers to take out loans. As a result, they tend to spend less, which, in theory, slows economic growth. The goal of a soft landing is to balance the need to control inflation with the need to maintain economic growth.

Soft landings are difficult to predict and difficult to achieve. If the Federal Reserve increases interest rates too quickly or too much, it can cause the economy to fall into a recession. On the other hand, if interest rates are not increased enough, inflation can spiral out of control and cause long-term economic damage.

Is the US headed for a soft landing? 

The latest from the White House is that the US is on course for a soft landing, but, as is often the case in economic matters, many esteemed economists and analysts share less optimistic outlooks. And even if the US manages to pull off a soft landing, it doesn’t mean that other countries will be able to do the same. The good news is that recent inflation numbers all point to the fact that the Fed is slowly regaining control over inflation, meaning they can ease off the throttle when hiking interest rates going forward.