Data suggesting slowdown in inflation raises estimates for soft landing in US economy
Date
10/23/2024 8:13:48 AM
(MENAFN) Recent data suggesting a slowdown in inflation and ongoing economic growth have led to rising estimates for a soft landing in the US economy. The possibility of whether the Federal Reserve (Fed) will successfully navigate this challenge with a soft or hard landing remains uncertain. While the latest indicators lean toward a soft landing scenario, external factors such as geopolitical tensions and the upcoming presidential elections on November 3 pose risks that could disrupt this outlook.
In economic terms, a soft landing is akin to a gradual and damage-free descent of an airplane. It refers to the delicate balancing act of monetary policy tightening that aims to control inflation without triggering significant negative consequences for the economy. Although the term "soft landing" does not have an official definition, it typically describes the cooling of an overheated economy without pushing it into a recession, achieved through careful monetary policy measures.
A successful soft landing occurs when a central bank raises interest rates to combat inflation while avoiding a substantial increase in unemployment or a downturn in the country’s gross domestic product (GDP). In contrast, a hard landing refers to a scenario where these policy decisions result in recession and elevated unemployment levels. Historical examples highlight the challenges of this balancing act; for instance, in 1979, former Fed Chairman Paul Volcker raised interest rates above 19 percent to combat inflation, which was running at 11 percent annually. This aggressive move led to a deep recession that lasted 16 months and saw unemployment peak at 10.8 percent.
In contrast, a notable example of a soft landing occurred during the tenure of Fed Chairman Alan Greenspan in February 1994. At that time, US unemployment decreased from 7.8 percent to 6.6 percent while inflation stood at 2.8 percent and interest rates were around 3 percent. Concerned about potential inflation, the Fed preemptively raised interest rates from 3 percent to 6 percent in 1994 and subsequently cut them the following year. Greenspan later referred to this period as one of the Fed’s "proudest" achievements in his memoirs, demonstrating the delicate interplay between monetary policy and economic stability.
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