Economists, policymakers and the media will analyze every word of Federal Reserve Chair Jay Powell’s comments following this week’s Federal Open Market Committee meeting. A significant rate hike is all but inevitable – the question is by how much.
With worse-than-expected inflation numbers for August, Powell will likely be asked if the Fed has given up trying to achieve a so-called soft landing – fighting inflation without seriously hurting the economy.
Economics loves its aviation terms: “headwind,” “tailwind,” “glide paths,” even the word “bailout,” if you think about it.
But the “soft landing” came about well above the cruising altitude of most economic metaphors.
“It was really the space race between the US and the Soviet Union that got so much attention,” said Ben Zimmer, a linguist who writes the history of financial conditions for The Wall Street Journal.
Americans had space fever in the late 1960s and early 1970s. When prices rose sharply in 1973, then Treasury Secretary George Shultz invoked the term “soft landing” to describe how a mild economic slowdown could fight inflation.
“Because these were terms that were just in the air, they became something that financial professionals could use as a sort of metaphorical foundation,” Zimmer said. “What we’re trying to do with economics is metaphorically similar to trying to guide a lunar capsule to the surface of the moon.”
Unlike NASA, neither the Richard Nixon administration nor the Fed actually succeeded in doing this.
Cheers to Neil Armstrong, we’ve landed astronauts on the moon six times. We’ve only had a perfect economic soft landing once.
“There’s an old saying about being lucky rather than being good,” said Alan Blinder, 1994-1996 vice chairman of the Federal Reserve and economic historian. “For a perfect soft landing you have to be both lucky and good.”
In 1994 inflation was around 3% – not so bad. And the gross domestic product growth and the unemployment rate have been pretty good.
But then-Fed Chairman Alan Greenspan thought that if the Fed didn’t hike rates, inflation would be right around the corner. Real interest rates had been stuck at zero for a while.
“If you want to get a soft landing, it’s a good idea to get going early so you don’t really have to hit the brakes,” Blinder said. In other words, to avoid having to launch an aggressive campaign to raise interest rates.
But the idea of a preemptive rate hike was not popular. The best the Fed has done in the past has been soft landings, which continue to disrupt the economy and job markets.
Still, the Fed went ahead and doubled its benchmark interest rate instrument – the federal funds rate – in just 13 months.
It worked. Inflation stayed low, the economy continued to grow and the job market was great.
“That set the stage for the later years of the 1990s, which were fabulous,” Blinder said. “That was the time when people said everything that should go up went up and everything that should go down went down. It was like perfection.”
Blinder thinks the phrase “soft landing” works well. It’s a way of communicating the Fed’s goals to the public, even if it oversimplifies things.
But BNY Mellon economist Vincent Reinhart, who was also with the Fed in the 1990s, isn’t a fan. He said there’s a reason Greenspan doesn’t use the metaphor very often.
“I think it suggests more control over the economy than a central bank really has,” Reinhart said.
Jay Powell has no say in Russia’s invasion of Ukraine or China’s COVID lockdowns, and played no visible role in last year’s government stimulus checks. The Fed did not have to deal with such problems in the mid-1990s.
Reinhart said that if we’re torturing the soft landing metaphor, it’s more accurate to make it more like “Top Gun.”
“The correct image is that you are actually a carrier pilot trying to land a plane on the carrier deck in a storm. When you say ‘soft landing,’ you’re saying, ‘Trust me, I’m Tom Cruise.’”
The Fed looks like it’s moving away from the whole soft landing thing as inflation remains persistently high. Powell’s recent Jackson Hole speech was anything but gentle, emphasizing the pain to come as interest rates soar.
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