Inflation in the US: What is a ‘soft landing’ and how does it affect the economy?
The Federal Reserve has been raising interest rates to fight inflation, and as the economy holds steady, some experts now predict a soft landing for the US.
Inflation reached four-decade highs in the middle of 2022, and the Federal Reserve has announced 11 interest rate hikes since March of last year to fight soaring prices.
As the central bank continued to announce increases, there were concerns of the US heading into a recession. A recession is characterized by negative economic growth, meaning that a country’s gross domestic product (GDP) contracts for two consecutive quarters or more.
Despite the Fed raising interest rates to their highest level in 22 years, economists have been stating that they no longer expect a recession. Last week, the Bank of America became the first large Wall Street bank to backtrack on its recession forecast.
Instead, hopes are high that the country is heading towards a “soft landing”.
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What is a ‘soft landing’ and how does it affect the economy?
A “soft landing” refers to a scenario in economics where a country’s economy transitions from a period of rapid economic growth or expansion to a more sustainable and stable growth rate, without experiencing a sharp downturn or recession.
The goal of a soft landing is to avoid the negative consequences of an abrupt economic slowdown, such as rising unemployment, falling consumer spending, and declining business activity.
The concept of a soft landing underscores the challenge of maintaining a delicate balance in the economy. Policymakers such as the Federal Reserve often walk a fine line between stimulating economic activity and preventing overheating or recession.
If the US does achieve a soft landing, the economy would be characterized by the following:
Gradual economic slowdown
Instead of a sudden and severe contraction, economic growth moderates to a more sustainable pace. This allows for a controlled adjustment of various economic indicators, such as GDP growth and inflation.
Stable employment
During a soft landing, the job market remains relatively stable, with low unemployment rates. As far as the July figures from the Labor Department indicate, this is currently in place, at 3.5%. An intact job market is important to maintain consumer confidence and spending levels. Job growth should also be present, although this growth should not be too strong either.
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Controlled inflation
Inflation is kept in check or gradually reduced to prevent excessive price increases, which erode consumers’ purchasing power. The Federal Reserve is working towards a 2% rate, and this week’s Consumer Price Index report will show whether inflation has gone closer to this number.
Business confidence
Maintaining business and investor confidence is crucial for a soft landing. If businesses feel optimistic about the future and continue to invest and expand, it can help sustain economic activity.