What Is a Soft Landing?
A soft landing, in economics, is a cyclical downturn that 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.
- A soft landing refers to a cooling down of the economy following a period of rapid expansion, which happens smoothly.
- With a smooth landing, an economic contraction is moderate and does not lead to a recession, as may happen with a hard landing outcome.
- Central banks and governments often try to steer an economic downturn toward a soft landing through monetary and fiscal policies that prevent a sharp decline in output.
Understanding Soft Landings
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 to 1995, when the Fed raised interest rates enough to slow the economy, but not enough to cause an economic contraction.
The term "soft landing" comes from aviation, where it refers to the kind of landing that goes smoothly and without a hitch, with no bumps or glitches.
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 through 2019. 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.
A hard landing, in contrast, is often seen as a result of tightening economic policies that bring high-flying economies that run into a sudden, sharp check on their growth, such as a monetary policy intervention meant to curb inflation. Economies that experience a hard landing often slip into a stagnant period or even recession.
Most officials want to see a soft landing, where the overheating economy is slowly cooled off without sacrificing jobs or unnecessarily inflicting economic pain on people and corporations carrying debt. Unfortunately, the more heated an economy becomes through stimulus or other economic interference, the more vulnerable it becomes to a hard landing due to even minor checks on growth.