What Are Soft, Hard, or No Landings?

Views 16KAug 9, 2023

Key Takeaways

● A soft landing is a moderate slowdown in economic growth with controlled reduction in inflation following a period of growth.

● A hard landing occurs when the economy contracts sharply due to the central bank's efforts to control inflation.

● A no-landing occurs when the economy continues to grow despite a series of contractionary monetary policies.

The term landing, which has its roots in aviation and is commonly used to describe the act of an airplane, spacecraft, or hot air balloon touching down, has also become a prevalent concept in economics.

In cases where inflation becomes severe due to rapid economic growth, countries may choose to implement contractionary monetary policies to restrict inflation. This results in a decrease in total social demand and a potential reduction, or even negative turn, in economic growth, which is similar to the act of "landing".

What are hard landing and soft landing?

● Hard landing can occur when the central bank raises interest rates too high or too quickly to tame rising inflation, but ultimately steer the economy towards a recession. A hard landing is characterized by a rapid decline in the economy, higher rates of unemployment, and reduced economic activity.

● A soft landing can be achieved when the central bank gradually increases interest rates, helping stabilize the economy and avoid a recession or high unemployment.

Historical Examples of Soft Landings

In times of high inflation, the US Federal Reserve and other central banks will step in to maintain price stability. This can be achieved through measures such as selling Treasury securities, purchasing mortgage-backed assets, and increasing interest rates, such as the federal funds rate. These actions are known as contractionary monetary policies.

According to Federal Reserve Chair Jerome Powell, the US central bank successfully achieved soft landings in 1965, 1984, and 1995.

● 1965: In October 1964, the federal funds rate was at 3.4% but by November 1966 it was at 5.8%. However, during that period, the unemployment rate declined from 5.1% to 3.6%.

● 1984: In February 1984, the federal funds rate was at 9.6% and it rose to 11.6% by August of that year. However, the unemployment rate dropped from 7.8% to 7.5%.

● 1995: In December 1993 the federal funds rate was at 3% but by April 1995 it stood at 6%. However, during that same period, the unemployment dropped from 6.5% to 5.8%.

Historical Examples of Hard Landings

A hard landing happens when central banks' tightening policies result in deflation, a rapid rise in unemployment, and a severe economic downturn.

Since 1965, the Fed has undergone 11 cycles of raising interest rates, and with the exception of three we mentioned earlier, all others resulted in varied degrees of economic downturns.

In 2007, the United States experienced a typical hard landing when the Federal Reserve increased monetary policy to regulate the speculative housing market, culminating in the Great Recession.

What is no landing?

The possibility of a "no landing" scenario for the US economy is a hotly debated topic, as the Federal Reserve moves to reduce inflation with several rounds of interest rate hikes.

Is this the best case scenario? The crux of the matter is inflation.

In a word, the primary objective of the Fed is to tame inflation. If there are still signs of rising inflation, the Fed will almost certainly keep raising interest rates in the near future. It is possible that elevated interest rates eventually land the US economy into a recession.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.