When inflation gets uncomfortably high — as it did in 2022 — central banks will usually intervene in an attempt to stabilize and control the level of prices. A soft landing occurs if they can do it without causing a recession. Soft landings are ubiquitous in the financial press, but not so much in the real world.
The U.S. Federal Reserve has seldom orchestrated a soft landing since higher interest rate policy responses tend to increase unemployment. And they’re not alone, because this ideal economic outcome has proven elusive for central banks.
In fact, the only widely (and not unanimously) agreed-upon soft landing in the U.S. is said to have occurred in 1994-1995, under Fed Chairman Alan Greenspan. But, inflation was only 3% at the time.
The effects of contractionary monetary policy unfold slowly, which makes taming inflation a real challenge for central bankers. If tightened too quickly or too much, there is a very real possibility of trouble ahead because a consequence of getting the policy response wrong is overdoing interest rate increases (tightening) to the point of triggering a recession.
If interest rates are increased too quickly or get too high, the economy can face an undesirable hard landing.
Central bankers need to find that delicate balance between policy responses that tamper inflation and those that stifle growth, which is no easy feat.