The economy does not respond quickly—or even always predictably—to changes in policy from the Fed. To quote from a recent Igor Greenwald article on Investopedia, “The Fed's main policy tools, interest rates and asset holdings, are blunt instruments not designed to solve supply chain disruptions or pandemics.” 1 Or wars in Europe or several other factors that barely existed prior to recent years.
Also, one word you’ll see a bit too often when reading about Fed policy and intended results is “luck.” As you know, luck is not a measurable commodity. Still, you can’t blame The Fed for trying. And what they have been trying to do is induce a “soft landing” in the U.S. economy.
What’s a “Soft Landing”?
When inflation is getting the upper hand, the Fed’s first instinct is to raise interest rates. For consumers, this tends to influence putting more money into savings and spending less, thus reducing the amount they’re willing to spend. But this makes it more expensive for businesses to borrow money to invest in growth. Meanwhile, there are always plenty of dynamics in the labor market. Too much unemployment can push the economy further toward a recession.
A soft landing is intended when the Fed tries to raise interest rates to dampen inflationary outbursts, but without actually inducing a recession.2 But, given the difficulty, and delayed effect, of the Fed’s actions, is a soft landing even possible? Goldman Sachs seems to think so. Goldman has, in recent months, been especially upbeat in its prediction of a soft landing, especially when compared to economists in general. For example Goldman forecasts an unemployment rate a year from now to be 3.8%; it is currently at 3.7%.3 And, now that we’ve started to get a handle on soft landings, there’s another related term to touch on: “growth recession.”
A “Growth Recession”
George Orwell would have no problem recognizing the term “growth recession” as doublespeak, possibly even doubleplusgood doublespeak. So what does this term mean and where did it come from?
NYU economist Solomon Fabricant coined the term “growth recession” in 1972 to describe an extended period of slow growth and rising unemployment.4 If the Fed succeeded in creating a “growth recession,” it would essentially be a soft landing in slow motion, probably prolonging even further the path to full economic recovery. When all is said and done, maybe the best we can hope for, even with luck, is a soft landing.
A Sidenote on Recent History
A selloff is not a recession. The S&P 500 dropped about 4.3% and the Dow Jones Industrial average was off by over 1,200 point this past Tuesday [yesterday, depending on publish date of this blog].5 But dramatic corrections like this do not signal a recession, which is a longer-term phenomenon. So, even though today’s topic is about the potential for a soft landing, short-term volatility in the markets doesn't necessarily make such a development impossible.
4 Bloomberg (Rich Miller, analyst) https://www.washingtonpost.com/business/energy/why-fed-aim-is-growth-recession-a-not-soft-landing/2022/09/01/b5b69cb2-2a12-11ed-a90a-fce4015dfc8f_story.html
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