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The US Federal Reserve has a delicate job ahead – pumping the brakes on the economy in a masterful way to achieve what is known as a “soft landing”.
Essentially, the central bank is trying to curb demand and control prices without pushing the economy into recession.
But stopping sky-high inflation has become a daunting task. Top Fed policymakers this weekend are expected to raise rates for the fourth time in five months. They moved stronger than expected at the start of the year.
Fed Chairman Jerome Powell recently hinted that a “light” landing on the economy is entirely possible.
But history shows that achieving the perfect landing is easier said than done.
So what exactly is a soft landing?
Like a pilot gently landing an airplane, delicate throttle is required to avoid economic stalling.
“The Fed slows down the economy by raising interest rates, which cuts spending,” said Princeton economist Alan Blinder. “If you do too much of that, you’ll be in recession.”
Blinder was vice chairman of the Federal Reserve in the 1990s, when the central bank engineered a perfect “soft landing.” From 1994 to early 1995, the Fed raised its benchmark interest rate from 3% to 6%. While economic growth slowed, GDP never fell and the job market remained strong, with the unemployment rate actually falling.
What is the Fed’s track record?
Usually, however, the economic docks are very bumpy.
“We’ve had 13 or 14 recessions since World War II, and more than two-thirds of those recessions have been caused by the Fed raising rates faster than the economy,” said University of Chicago economist Austan Goolsbee. economy can handle. Sunday weekend version.
And many forecasters worry that in an attempt to control current high inflation, The Fed can send the economy into recession.
But Blinder is more optimistic, taking history as a guide. He scrutinized the 11 periods between 1965 and 2020 in which the Fed raised rates. While a perfect soft landing occurred only once, the recession in six of the other cycles was limited with little or no decline in GDP and only a slight increase in the unemployment rate.
“The moral of the story for me, gentleish Blinder said.
Another five rate hikes were followed by severe recessions. But in those three cases, Blinder argues that the central bank does not even try for a gentle landing – including the draconian rate hikes under former Fed chairman Paul Volcker in the late 1970s and early 80s when he was grappling with double-digit inflation.
Two other recessions are thought to be unrelated to the Fed’s actions, including the 2020 pandemic recession.
“In addition to skill,” Blinder said, “you need to be lucky.”
What is against the Fed right now?
The Fed is facing some serious contradictions, making its job of curbing inflation more difficult. The pandemic combined with Russia’s invasion of Ukraine has severely disrupted supplies, driving prices up.
Powell says he still sees a path to a gentle landing. But he admits, it is not entirely within the control of the central bank.
“It doesn’t get any easier,” Powell told reporters last month. “It’s become more and more difficult because of these external forces.”
The economy is tolerable for some unemployment, but painful for those who lost their jobs
One of the main things a central bank does is a strong job market todaytherefore, a slight increase in unemployment may be more tolerable than otherwise.
Powell said if the cost of curbing inflation was a half-point increase in the unemployment rate – from June’s 3.6% to 4.1% – he would consider that a successful outcome and a downgrade. gentle wings.
“We’re not looking to push people out of work,” Powell said. “But we also think you can’t really have the kind of labor market that we want without price stability.”
Blinder agrees, noting that the unemployment rate had risen above 10% during Volcker’s purposeful landing in the early 1980s.
“It’s kind of a horrible unemployment rate,” said Blinder. “And I certainly don’t believe that Fed Powell, first of all, has to do anything like that or wants to do anything like that.”
Blinder warns, however, not at all The rising unemployment rate hurts those affected.
“For those who lost their jobs,” he said, “this is not soft at all.”