Soft Landing

A soft landing, in economics, is a cyclical downturn which avoids recession. It typically describes attempts by central banks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a significant increase in unemployment, or a hard landing. It may also refer to a sector of the economy that is expected to slow down without crashing.

Governments and central banks often attempt soft landings by fine-tuning fiscal or monetary policy. The concept was conceived by Alan Greenspan, former chairman of the Federal Reserve, who engineered the only true soft landing in U.S. history in 1994-95, when the Fed raised interest rates enough to slow the economy, but not enough to cause an economic contraction.

Unfortunately, central banks’ efforts to engineer soft-landings have a track record of inadvertently causing subsequent bubbles and crashes. The subprime meltdown has been blamed on excessive rate cuts in 2001, which caused an asset bubble in housing. In fact, there has never been a soft landing following an economic or stock market bubble. This is because a bubble would not be considered a bubble if it were followed by a soft landing, and why talk of soft-landings is met with skepticism. Some economists say it amounts to little more than economic mumbo-jumbo.

The Fed is attempting another soft landing in 2018. This time it is attempting to increase employment, while at the same time raising rates to keep inflation in check. The fear is that tax cuts and increased government spending could lead to a wage-price spiral which would eventually force the Fed to raise interest rates sufficiently to cause a recession and trigger a sell-off in the capital markets.