There’s a lot going on in the economy, ranging from fears of a recession to bank failures, and more. It’s a turbulent time, to borrow an aviation phrase, and has many people wondering when, if, or how things will eventually calm down.
Accordingly, you may have heard some experts or pundits in the news discussing a “soft landing” or a “hard landing.” This relates to how we eventually phase into the next stage of the economic cycle. The basic idea here is that a “soft landing” would see us work through current wide-scale economic issues without tipping into a recession. A “hard landing,” on the other hand, would mean that we likewise enter the next phase, but do so in an uglier fashion—by forcing the economy into recession.
The Fed, soft landings, and the economy
As it relates to our specific economic environment, the soft landing rhetoric concerns the Federal Reserve, and how it’s more or less “piloting” the economy through a bout of high inflation and more in the wake of the pandemic. It’s hard to overstate this: The pandemic threw everything for a loop, and we’re currently actually living through some pretty unusual economic times.
As such, the Fed is trying to get us through it, and lead us to a “soft landing.” If they succeed, then great — we’ll have made it through with minimal economic damage. If they do tamper inflation but need to raise unemployment and put the economy in a recession to do so, well — that’s not so great, but the Fed would have achieved its goal. Right now, that goal is to lower inflation.
So, while the “landing” analogies can be used in a variety of economic contexts, as it stands in 2023, we’re really talking about inflation and rising interest rates. The question is this: Can the Fed raise interest rates high enough to where inflation comes down, but unemployment does not go up? As of April, it seems to be threading the needle, but that could change.
Again, the best-case scenario is for a “soft landing.” There’s no guarantee that we’ll get one, however.
The relationship between interest rates and inflation
It may seem sort of strange that the Fed is playing with fire and even risking sending the economy into a recession, right? It is, but it’s really the only choice it has to bring rising prices down, or to slow the rate of their increase.
The Fed aims for 2% inflation per year. That’s the target. But recently, we’ve seen inflation as high as 10%, 9%, etc. Most recently, it’s been around 5% or 6% — better, but still far from the target. The Fed’s primary method of bringing prices down is to slow demand. That’s where interest rates come into play.
Higher interest rates make it more expensive to borrow money. As such, fewer people will borrow money to buy cars, houses, etc. That, in effect, lowers demand, which should lead to lower prices. That’s the whole game here. That’s why the Fed is raising interest rates: To slow inflation.
Again, though, the question is whether we’ll see a hard or soft landing. As of spring 2023, we’ll have to wait and see!
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