Soft Landing: Definition and History in Economics

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Updated May 26, 2024
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What Is a Soft Landing?

A soft landing is a cyclical slowdown in economic growth that ends without a period of outright 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 but not enough to cause a severe downturn.

Soft landing may also refer to a gradual, relatively painless slowdown in a major industry or economic sector.

Key Takeaways

  • A soft landing is a painless ending to a moderate economic slowdown.
  • The term implies that the economy has returned to growth without a period of severe recession.
  • 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.

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 routine success.

The term "soft landing" gained currency during the tenure of former Federal Reserve chair Alan Greenspan, who was 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 2022 Mini-Recession

Inflation exceeded 5% in 2022. By the definition of a recession (two consecutive quarters of negative GDP growth), the economy was in a recession after the first and second quarters of 2022. The third quarter reversed the trend with growth in the gross domestic product (GDP).

To combat inflation, the Fed implemented interest rate increases over the year, which resulted in a decrease in inflation combined with economic growth in Q3.

The term "soft landing" comes from aviation, and refers to a smooth touchdown.

Special Considerations

The Fed's soft landings record is, at best, mixed since the central bank doesn't exercise the same level of control over the economy as a pilot does over aircraft. The Fed's main policy tools—interest rates and asset holdings—are blunt instruments that can't solve supply chain interruptions or pandemic disruptions.

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.

What Is a Soft Landing vs. a Hard Landing in Economics?

A nation's central bank adjusts interest rates to manage inflation. If inflation is too high, the central bank will increase interest rates to discourage spending.

If the central bank raises interest rates too high or too soon, it could cause a hard landing. That is, the economy could dip into a recession.

If the central bank raises interest rates slowly or in small increments, it is aiming for a soft landing.

It's not as easy as it sounds. A hard landing has serious negative repercussions.

What Are the Main Causes of Inflation?

The four main causes of inflation are demand-pull inflation (when the demand for goods and services is greater than the available supply), cost-push inflation (when production prices rise), an increase in the money supply, rising wages, and a devaluation of a nation's currency.

What Are the Components of Monetary Policy?

A country's central bank has three primary tools to control its monetary policy. These are controlling the reserve requirements of banks, adjusting the discount rate (the interest rate charged to financial institutions when borrowing from the central bank), and open market operations (the buying and selling of securities).

The Bottom Line

The Fed's attempts to bring about a soft landing are complicated by policy lags. The economy takes time to respond to changes in monetary policy. As a result, the Fed must determine the pace of rate hikes without the benefit of seeing the full effect of prior ones.

Such constraints mean luck plays at least as big a role as skill when it comes to engineering a soft economic landing.

Article Sources
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  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. Trading Economics. "United States Inflation Rate."

  5. Bureau of Economic Analysis. "Gross Domestic Product."

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

  7. Fred Economic Data. St. Louis Fed. "Federal Funds Effective Rate."

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

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

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