07/18/2023

In 2021, the US economy recorded its highest growth since 1984, as lockdowns relating to the COVID-19 pandemic were abandoned. In 2022, however, growth slowed considerably, as the Federal Reserve began to tighten its monetary policy. The aim of the movement is to cooling strong inflationary pressures without ruining the economy.
Last year, real estate activity collapsed and manufacturing entered a recession. However, the labor market remained strong and economic activity remained at reasonable levels. In 2023, the trend seems to be the same, but the key question is - what will happen next? Will the economy experience a soft landing, a hard landing - or somewhere in the middle? And what if there is no landing?

• What is a soft landing? This is when the central bank is cooling the economy enough to stop demand and inflation, but without triggering an economic crisis and without causing a collapse in the labor market. This is the Federal Reserve's goal, although to achieve this, it not only needs expertise, but also a lot of luck.   
• What is a hard landing? En una palabra: an economic recession. This is what many economists have predicted will happen, as the effects of the most aggressive monetary adjustment campaign since 1980 are filtering through to the economy. If inflation does not weaken or if the Fed makes a policy mistake, the labor market could collapse, which would end up sinking the economy. Neither Powell nor, above all, Biden would want this scenario.   
• Is there a middle ground? Yes. The so-called "growth recession" involves a prolonged period of economic growth below the long-term potential and rising unemployment rates, but without a total contraction of the economy.   
• And a "no landing" scenario? Until the outbreak of the pandemic in 2020, the Australian economy had not recorded a recession for 30 years. Recessions have a cyclical component, but they are by no means inevitable. The "no landing" scenario, which began to circulate in early 2023, involves a reacceleration of economic activity, which does not slow the trend of deflation. In this environment, the economy would not end up reaching a stalemate.   
• Could the Fed increase the long-term target for inflation from the current 2%? Some analysts criticize the arbitrary definition of the inflation target at 2%. Why not increase it to 2.5% or 3%?, they argue. The Fed insists that they have not considered this possibility and that the target of 2% is irrevocable. However, they have also made it clear that they are prepared to tolerate inflation above the target for some time, especially if it is low. In short, the Fed does not intend to destroy the economy solely to get inflation back to its target quickly.   
• Has the Fed ever achieved a soft landing for the economy? Yes. In 1994-1995, when chaired by Greenspan, the Fed doubled its interest rates and raised them to 6%, thus slowing down economic growth without ending the cycle. Monetary tightening, however, caused substantial losses to fixed-income investors (although not as intense as those suffered in 2022) and the financial bankruptcy of Orange County, California. 
• Have all other attempts failed? Not all of them. The Fed has achieved some "quite soft" landings in the last half century. In 2001, there was a very mild recession, lasting just 8 months.