In late 1989, an economic commentary newsletter from the Federal Reserve Bank of Cleveland asked the question that was on everyone’s mind after a series of Federal Reserve rate increases: “How Soft a Landing?” Analysts were pretty sure growth was going to cool gently and without a painful downturn; the question was how gently.
In late 2000, a column in The New York Times was titled “Making a Soft Landing Even Softer.” And in late 2007, forecasters at the Federal Reserve Bank of Dallas concluded that the United States should manage to make it through the subprime mortgage crisis without a downturn.
Within weeks or months of all three declarations, the economy had plunged into recession. Unemployment shot up. Businesses closed. Growth contracted.
It is a point of historical caution that is relevant today, at a moment when soft-landing optimism is, again, surging.
Inflation has begun to cool meaningfully, but unemployment remains historically low at 3.6%, and hiring has been robust. Consumers continue to spend at a solid pace and are helping to boost overall growth, based on strong gross domestic product data released Thursday.
Given all that momentum, Fed staff economists in Washington, who had been predicting a mild recession late this year, no longer expect one, Jerome Powell, the central bank’s chair, said during a news conference Wednesday. Powell said that while he was not yet ready to use the term “optimism,” he saw a possible pathway to a relatively painless slowdown.
But it can be difficult to tell in real time whether the economy is smoothly decelerating or whether it is creeping toward the edge of a cliff — one reason officials like Powell are being careful not to declare victory. On Wednesday, policymakers lifted rates to a range of 5.25% to 5.5%, the highest level in 22 years and up sharply from near-zero as recently as early 2022. Those rate moves are trickling through the economy, making it more expensive to buy cars and houses on borrowed money and making it pricier for businesses to take out loans.
Such lags and uncertainties mean that while data today are unquestionably looking sunnier, risks still cloud the outlook.
“The prevailing consensus right before things went downhill in 2007, 2000 and 1990 was for a soft landing,” said Gennadiy Goldberg, a rates strategist at TD Securities. “Markets have trouble seeing exactly where the cracks are.”
The term “soft landing” first made its way into the economic lexicon in the early 1970s, when America was fresh from a successful moon landing in 1969. Setting a spaceship gently on the lunar surface had been difficult, and yet it had touched down.
By the late 1980s, the term was in widespread use as an expression of hope for the economy.
Fed policymakers had raised rates to towering heights to crush double-digit inflation in the early 1980s, costing millions of workers their jobs. America was hoping that a policy tightening from 1988 to 1989 would not have the same effect.
The recession that stretched from mid-1990 to early 1991 was much shorter and less painful than the one that had plagued the nation less than a decade earlier — but it was still a downturn. Unemployment began to creep up in July 1990 and ultimately peaked at 7.8%.
The 2000s recession was also relatively mild, but the 2008 downturn was not: It plunged America into the deepest and most painful downturn since the Great Depression. In that instance, higher interest rates had helped to prick a housing bubble — the deflation of which set off a chain reaction of financial explosions that blew through global financial markets. Unemployment jumped to 10% and did not fall back to its precrisis low for roughly a decade.
The episodes all illustrate a central point. It is hard to predict what might happen with the economy at a moment when rates have risen substantially.
Interest rates are like a slow-release medicine given to a patient who may or may not have an allergy. They take time to have their full effect, and they can have some really nasty and unpredictable side effects if they end up prompting a wave of bankruptcies or defaults that sets off a financial crisis.
In fact, that is why the Fed is keeping its options open when it comes to future policy. Powell on Wednesday was clear that central bankers did not want to commit to how much, when or even whether they would raise rates again. They want to watch the data and see if they need to do more to cool the economy and ensure that inflation is coming under control, or whether they can afford to hold off on further interest rate increases.
“We don’t know what the next shoe to drop is,” said Subadra Rajappa, head of U.S. rates strategy at the French bank Société Générale, explaining that she thought Powell took a cautious tone while talking about the future of the economy Wednesday in light of looming risks; credit has been getting harder to come by, and that could still hit the brakes on the economy.
“It looks like we’re headed toward a soft landing, but we don’t know the unknowns,” Rajappa said.
That is not to say that there isn’t good reason for hope, of course. Growth does look resilient, and there is some historical precedent for comfortable cool-downs.
In 1994 and 1995, the Fed managed to slow the economy gently without plunging it into a downturn in what is perhaps its most famous successful soft landing. Ironically, commentators quoted then in the Times weren’t convinced that policymakers were going to pull it off.
And the historical record may not be particularly instructive in 2023, said Michael Feroli, chief U.S. economist at JPMorgan. This has not been a typical business cycle, in which the economy grew headily, fell into recession and then clawed its way back.
Instead, growth was abruptly halted by coronavirus shutdowns and then rocketed back with the help of widespread government stimulus, leading to shortages, bottlenecks and unusually strong demand in unexpected parts of the economy. All of the weirdness contributed to inflation, and the slow return to normal is now helping it fade.
That could make the Fed’s task — slowing inflation without causing a contraction — different this time.
“There’s so much that has been unusual about this inflation episode,” Feroli said. “Just as we don’t want to overlearn the lessons of this episode, I don’t think we should overapply the lessons of the past.”
