What it means
When inflation is higher than a central bank wants, the bank can tighten policy, and in the United States the Federal Open Market Committee can raise the target range for the federal funds rate. The aim is to slow spending enough to reduce inflation, but the risk is overcorrection.
A Saint Louis Fed article by Kristie Engemann quotes economist Paulina Restrepo-Echavarria describing a soft landing as raising rates and lowering inflation without unemployment rising drastically or GDP growth turning negative, while a hard landing lowers inflation at the cost of a recession and high unemployment. The same article stresses that there is no exact definition, since a mild recession without very high unemployment is possible and the boundary is a matter of judgment.
It names the unemployment rate as the first indicator and real GDP growth as the second. Researchers sometimes use a stricter rule.
A Federal Reserve FEDS Note on past easing cycles defines a soft landing as inflation tamed without a significant period of weak growth, and in practice it requires no technical recession, meaning two consecutive quarters of negative growth, from the start of the preceding tightening cycle until six quarters after easing begins. That note studies easing episodes in 13 advanced economies between 1960 and 2019 and finds 149 episodes, of which 25 were inflation-abating.
Of those, 11 were inflation successes, and 5 of the 11 met the soft-landing test. These counts apply only to that sample and that definition.
The St. Louis Fed article also offers history, describing the late 1970s and early 1980s tightening as a hard landing and the mid-1990s episode as a soft landing with a strong labour market and no recession in the second half of the decade, as examples and not a formula.
It points to job openings and hours worked as indicators of whether a soft landing is possible. It says it is hard to know how long the policy lags are, so the type of landing can be known only after time passes.
For a business or investor, the label is a description of an outcome, not a forecast. Different data sources can give different answers, and the verdict can change as revisions arrive.
A plan should therefore consider both outcomes, because the label only arrives after the data and the revisions do.
In practice
Real-world examples.
Example
A fictional central bank raises rates over two years. Inflation falls from 6 percent to 3 percent while unemployment rises by half a point and growth stays positive. Analysts call it a soft landing.
Example
In another fictional economy, inflation falls by a similar amount, but output contracts for two straight quarters and unemployment jumps. Analysts call it a hard landing, since the cost was a recession.
Example
A fictional analyst applies the Fed research test to a past episode. Growth is positive in every quarter from the start of tightening to six quarters after easing begins, and inflation is near target. The episode meets that study's soft-landing definition.
Formula
Calculation
Fed research test: soft landing if inflation is tamed and no two consecutive quarters of negative growth occur from the start of tightening to six quarters after easing starts. If quarterly growth is +0.3%, +0.1%, -0.4%, -0.2%, the last two quarters are consecutive negatives, so the test fails. If instead growth is +0.3%, +0.1%, -0.4%, +0.2%, there is only one negative quarter and no consecutive pair, so the growth condition is met, provided inflation was also tamed.
In the FEDS Note sample, 5 of 11 inflation successes were soft landings, or about 45%, and 11 of 25 inflation-abating episodes were successes, or 44%. These are results for that sample and definition.Case study
Seen in the real world.
This case study is fictional and illustrative. A manufacturer plans its budget while its central bank raises rates to fight inflation. The finance director tracks unemployment, real GDP growth and order backlog each quarter. She prepares two plans.
One assumes a soft landing, with modest demand growth and slowly falling inflation. The other assumes a hard landing, with weaker orders, tighter credit and a hiring freeze. As data arrive, unemployment rises slightly and growth stays positive, so the company keeps its soft-landing plan but holds a cost reserve. The label comes later, after the data and revisions.
The company decides using its own risks, not a headline. A year on, a revision lowers one quarter's growth estimate close to zero, and the commentary turns nervous. Because the finance director had already agreed trigger points with the board, such as a fall in the order backlog below a set level, the company does not rewrite its plan on a single data release. It reviews the triggers each quarter and leaves the reserve in place until the evidence is clearer.
Watch out
Common mistakes.
- Treating soft landing as an official, precise term.
- Declaring success from inflation alone without checking unemployment and growth.
- Treating a historical episode as a promise for the next cycle.
Questions
People also ask.
What is the opposite of a soft landing?
A hard landing, where inflation falls but a recession and high unemployment follow.
Is there one agreed definition?
No. The St. Louis Fed article says there is no exact definition.
Can a soft landing be known in advance?
Not reliably. The type of landing can be judged only after the data arrive.
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