Soft Landing

What is a Soft Landing in Economics?

In the face of economic overheating, what is a soft landing in economics? It’s the careful calibration of policies to slow growth and tame inflation without sending the economy into a recession. This analysis unpacks how such a balanced approach is targeted, its impact, and the Federal Reserve’s pivotal role in guiding a stable economic descent.

Understanding the Term “Soft Landing”

  • A ‘soft landing’ in economics refers to a strategy to cool inflation and avoid a recession, requiring precise adjustments in interest rates, but without a universally accepted definition and predictable outcomes, its success can be uncertain.
  • The Federal Reserve plays a crucial role in facilitating a soft landing through its monetary policy tools, aiming to preemptively adjust interest rates to control inflation without causing significant unemployment.
  • Achieving a soft landing is complex due to variables like inflation expectations, labor market conditions, economic imbalances among countries, and unpredictable economic forces, making the overall success challenging to forecast.

Defining a Soft Landing in Economics

Illustration of a plane landing smoothly

In economics, a soft landing denotes the measures taken to temper economic activity, regulate inflation, and sidestep a potential recession. It’s a delicate balancing act that involves mild adjustments in interest rates. Due to its lack of a universally accepted definition, the term is difficult to define and its interpretation can vary, especially with factors like mild recessions without excessive unemployment rates coming into play.

Therefore, the accomplishment of a soft landing can be swayed by external factors beyond policymakers’ control, incorporating elements of chance. The duration within which it can be determined if the economy is headed for a soft or hard landing is extremely difficult to predict, complicating the decision-making process for economic policymakers.

The Origin of the Term

The term ‘soft landing’ in economics is derived from the field of aviation, where it describes a gentle and controlled landing procedure. As in aviation, to achieve a soft landing in economics requires careful control and a gentle approach to avoid a devastating crash.

The Federal Reserve’s Role in Achieving a Soft Landing

The Federal Reserve holds a vital responsibility in steering economic growth towards a soft landing by manipulating interest rates and monetary policy. One of the strategies includes raising interest rates preemptively to prevent excessive inflation without triggering a significant rise in unemployment. Over the years, such increases have successfully slowed inflation while allowing for economic growth.

Reflecting on this, Federal Reserve Chair Jerome Powell has expressed cautious optimism about the potential for a soft landing.

Monetary Policy Tools

The Federal Reserve, acting as the central bank of the United States, employs several tools to steer its monetary policy, notably managing the reserve requirements of banks, modifying the discount rate, and executing open market operations. Open market operations involve the Federal Reserve buying short-term Treasury securities, which introduces more money into the banking system and generally results in lowered interest rates. In contrast, monetary policy tightening occurs when the central bank takes measures to reduce the money supply and increase interest rates.

These tools are part of the broader strategy of promoting maximum employment, stable prices, and moderate long-term interest rates.

Factors that Influence a Soft Landing

Numerous factors impact a soft landing, including:

  • Short-term inflation expectations, which are a primary driver of inflation dynamics in advanced economies
  • The labor market, with increased labor force participation contributing to a soft landing scenario
  • Economic imbalances, such as divergent growth rates and policy divergence among countries, which can lead to effects such as capital outflows and currency volatility.

Challenges in Achieving a Soft Landing

Attaining a soft landing is a formidable task. It requires agile policymaking from the Federal Reserve, characterized by flexibility and careful adjustment of monetary policy tools. However, the Fed faces economic forces beyond its control, including supply and demand imbalances and pandemic-related supply constraints.

Furthermore, the utilization of interest rate hikes to fight inflation can replace one problem with another, potentially causing layoffs and harming livelihoods when authorities decide to raise interest rates.

Historical Examples of Soft Landings

Graph showing economic indicators during a soft landing

Historical records present numerous instances of successful soft landings. One of the most notable is the soft landing achieved in 1994-1995 under Alan Greenspan’s tenure as Federal Reserve Chair. The Federal Reserve increased interest rates seven times in 1994, causing the federal funds rate to double from 3% to 6%. This had a significant impact on the economy. This preemptive measure cooled the economy, and in 1995, rate cuts were implemented to prevent triggering a recession.

Soft Landing vs. Hard Landing: Key Differences

The significant contrasts between a soft landing and a hard landing lie in the extent of the economic downturn, the unemployment rate, and the following recovery of the labor market. In a soft landing, unemployment rates may rise only slightly, whereas a hard landing can lead to a significant spike in unemployment rates. Understanding the differences between hard and soft landings is crucial for anticipating the potential impacts on the labor market.

A soft landing involves a gradual economic slowdown with easing inflation, while a hard landing involves a pronounced contraction leading to a recession.

Economic Indicators to Monitor for a Soft Landing

Numerous economic indicators merit observation to ascertain the possibility of a soft landing. These include:

  • Unemployment rates
  • Inflation
  • Supply-side factors
  • Market expectations about interest rate cuts

For instance, near-term inflation expectations have started to decrease, signalling a pivotal change for economic stability and a positive indicator for a potential soft landing, as a result of monetary tightening.

Job Openings and Hours Worked

Job openings and hours worked are important indicators for assessing the stability of the labor market and the likelihood of a soft landing in a tight labor market. For example, a reduction in hours worked can imply a decrease in aggregate income and demand, posing risks to the economic stability necessary for a soft landing.

Assessing the Probability of a Soft Landing in the Current Economy

Given the mixed views among economists and the diversity of contributing factors, the likelihood of a soft landing in the present economy remains unpredictable.

On the positive side, Goldman Sachs estimates a low 15% probability of a US mild recession over the next 12 months, signaling optimism and a favorable view towards the likelihood of a soft landing.


In conclusion, understanding the concept of a soft landing in economics involves a complex interplay of factors, from the role of the Federal Reserve and its monetary policy tools to the various economic indicators that can hint at the possibility of a soft landing. Achieving a soft landing is a challenging endeavor, requiring careful navigation of economic conditions, flexibility, and strategic policymaking.

Frequently Asked Questions

What does your soft landing mean?

A soft landing refers to a scenario where the economy slows down enough to reduce inflation to the Federal Reserve’s 2% target without entering a deep recession.

Has the Fed ever had a soft landing?

Yes, the Fed has achieved soft landings after monetary tightening in 1965, 1984, and 1994, though the current situation may pose more challenges.

What does softest landing mean?

A soft landing refers to a controlled and gradual touchdown of an airplane or spacecraft that does not cause damage.

What is the role of the Federal Reserve in achieving a soft landing?

The Federal Reserve uses tools like interest rate adjustments to manage inflation and steer the economy towards a soft landing.

What are some examples of soft landings in history?

Examples of soft landings in history include the 1994-1995 period under Alan Greenspan and the Federal Reserve’s achievements in 1965 and 1984.

Arthur Karter


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