Fed's history of soft landings

Alan Blinder, a professor of economics and public affairs at Princeton, served as vice chairman of the Federal Reserve in 1994-96. He is a highly respected economist so anything he says deserves attention. The Fed and Wall Street will surely be paying attention.


**The Fed’s Surprising Record With ‘Soft Landings’ From Inflation**
**History shows that, with skillful decisions and some good luck, central bankers can defeat inflation without causing a recession.**
**By Alan S. Blinder, The Wall Street Journal, Sept. 23, 2022**

**A careful historical analysis suggests, however, that the Fed has a much more encouraging record engineering a soft landing [than only once in 11 tries over the last 60 years, in 1994-95]. By my reckoning, it managed a soft landing or came close in six of the 11 cases. In the other five, it was either not trying to land the economy softly—because a hard landing was needed to crush high inflation—or its policy was overwhelmed by events out of the Fed’s control. To be sure, landing the economy softly is a tall order, but success is not unthinkable. The Fed has done it before...**


**Guns 'n' butter -->inflation --> tight money plus the 1968 tax increase --> since the net cumulative decline in real GDP during the 1969-70 recession was a mere 0.6%, I’d characterize it as a softish landing....**

**1970s, 1980 -- oil shocks, inflation -->tightenings --> recessions. Hard landings.**

**...yearlong cycle of rate increases from March 1988 to April 1989...I have long believed that this tightening cycle would have produced a soft landing were it not for the sharp spike in oil prices following Saddam Hussein’s invasion of Kuwait in August 1990. ...**

**The next rate-hiking episode began early in 1994 and lasted about a year. It led to a “perfect” soft landing...low inflation but zero real fed funds rate...preventive, gentle tightening which worked.**

**July 1999...a modest tightening, but along with the stock market crash of 2000, it was enough to precipitate the mild 2001 recession....** [The dot-com bubble burst and the stock market didn’t bottom until March 2002. --W]

**It’s true that the rate increases of 2004-06 and 2015-19 were followed by extremely painful recessions in 2007-09 and 2020. “Hard” is an understatement. But these recessions were not caused by tight money. The first came from the world financial crisis and the second was a product of the Covid-19 pandemic.** [The rising rates triggered the 2008 financial crisis by raising the cost of mortgages, including subprime mortgages, which popped the bubble. Blinder didn’t mention that. --W]

**Based on history, I’d rate the chances of a softish landing this time as well under 50% but well above zero. On the negative side, the Fed’s current task is not just to stabilize the inflation rate, as in 1994, but to bring it down substantially, as in 1980. That would be a tough job even without food and energy shocks. Unfortunately, the Fed’s luck started out bad, not good....** [end quote]

Prof. Blinder seems to be mildly optimistic due to the strong employment market and entrenched expectations of low, rather than high, inflation.

It takes a long time for Fed policies to affect the economy. This week, they forecast a fed funds rate of 4.5% by the beginning of 2023.

If inflation tapers down the Fed may stop there or perhaps toss in a couple of 0.25% raises and then hold for a few months. That would produce the soft landing and would be a great stock and bond buying opportunity.

If inflation doesn’t taper down the Fed will be forced to continue raising the fed funds rate and possibly increase QT. That would produce a hard landing.