Soft Landing

What Is a Soft Landing?

A soft landing, in economics, is a cyclical slowdown in economic growth that avoids recession. A soft landing is the goal of a central bank when it seeks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a severe downturn. Soft landing may also refer to a gradual, relatively painless slowdown in a particular industry or economic sector.

Key Takeaways

  • A soft landing refers to a moderate economic slowdown following a period of growth.
  • The Federal Reserve and other central banks aim for a soft landing when they raise interest rates to curb inflation.
  • The Fed has a mixed record in accomplishing a soft landing during past rate hiking cycles.
  • The likelihood of a soft landing is reduced by the time lags associated with monetary policy.

Understanding Soft Landings

While airline passengers can take soft landings for granted these days, the Federal Reserve's past interest-rate hiking cycles don't have the same track record of regular success.

The term "soft landing" gained currency during the tenure of former Federal Reserve chair Alan Greenspan, widely credited with engineering one in 1994-1995. Federal Reserve Chair Jerome Powell has also suggested the Fed achieved soft landings in 1965 and 1984, and was on course for another one in 2020 before the COVID-19 pandemic intervened.

In contrast, a recession followed the last five instances when inflation peaked above 5%, in 1970, 1974, 1980, 1990 and 2008.

The Fed's soft landings record is, at best, mixed because the central bank doesn't exercise nearly the same control over the course of the economy as a pilot has over aircraft. The Fed's main policy tools, interest rates and asset holdings, are blunt instruments not designed to solve supply chain disruptions or pandemics.

In dismissing another vehicular analogy, former Fed chair Ben Bernanke once said that "if making monetary policy is like driving a car, then the car is one that has an unreliable speedometer, a foggy windshield, and a tendency to respond unpredictably and with a delay to the accelerator or the brake." Nothing that's happened since has made the Fed's job look any easier.

The term "soft landing" comes from aviation, where it refers to the kind of landing that goes smoothly.

The Bottom Line

The Fed's attempts to bring about a soft landing are complicated by the policy lags Bernanke and many others have noted. Because the economy takes time to respond to changes in monetary policy, the Fed must determine the pace of rate hikes without the benefit of seeing the full effect of prior ones, or of its policy signaling.

For signaling to have an effect, the Fed's policy must be seen as at least somewhat predictable, limiting the central bank's flexibility in responding to economic developments. Such constraints mean luck still plays at least as big a role as skill when it comes to soft economic landings.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. BNP Paribas. "Soft Landings Are Difficult, Even More So Today."

  2. The New York Times. "The Fed Bets on a ‘Soft Landing,’ but Recession Risk Looms."

  3. Bloomberg. "Fed Seeks Economic Soft Landing, Rarely Seen in Wild: QuickTake."

  4. Reuters. "Column: Fed Searches for Elusive Soft Landing: Kemp."

  5. Northern Trust. "Soft Landings: Skill Meets Luck."

  6. The Federal Reserve Board. "Remarks by Governor Ben S. Bernanke."

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description