an intentional slowing down of the economy that does not result in recession.
Soft Landing Details
When an economy is about to experience a period of high inflation, central banks will raise interest rates. Theoretically, this settles down the economy enough without increasing unemployment numbers. When the unemployment rates go up significantly it can lead to an economic crash. Think of it like boiling water—if the water boils rapidly for too long, you end up losing all your water. If you restrict the heat—increase rates—the water will cool down to a simmer. You’ll still have bubbles, but you won’t lose all your water.
Although this controlled downturn may seem like it would work if central banks closely monitor their numbers and market trends, it is not a sure-fire method. The only time banks successfully pulled off a true soft landing was in 1994 to 1995 when the founder of the method, Alan Greenspan, first conceived the method. Besides then, other attempts have led to bubbles (not the boiling kind) and crashes. When there is a bubble, there is very rarely a soft landing.
Historical evidence shows that before the economic recessions the United States went through after World War II, the Federal Reserve raised interest rates. Attempting a soft landing is not as easy as it sounds.
Real World Example of a Soft Landing
Alan Greenspan, Federal Reserve chairman from 1987 to 2006, attempted a few notable soft landings in his career. The only successful one from 1994 to 1995, as mentioned before, brought an annual GDP growth from 5% to 0.8% over several—seventeen, to be exact—interest rate changes over fifteen months. At the time, various surveys showed that the economy was projected to grow by 2.6% in 1995 and 2.4% in 1996 (LATimes.com).
In 1990 and 1991, Greenspan raised rates, but GDP growth sunk into negative numbers, resulting in a mild recession. Between 2000 and 2001, he raised rates six times. For some economists, this slowdown was a bit too forceful and ultimately resulted in the housing market bubble and its subsequent crash.
What was different between these other attempts at a soft landing and the one in 1995? The difference could have had something to do with economic restructuring under President Clinton and the IT revolution. This new area's growth led to higher productivity and possibly cushioned GDP growth as it slowed down (BNPParibas.com).
Soft Landing vs. Hard Landing
The higher economies fly, the harder economies fall. In the case of economic landings, this much is true. Whereas a soft landing is like a plane landing without any bumps or technical problems, a hard landing is like a plane that lands and rattles and skids—it lands, but not gracefully at all. When an economy becomes overstimulated and the central banks take stricter policy measures, the economy can come crashing down. A hard landing is not a crash but can cause enough damage to leave an economy vulnerable to one. Many expected soft landings end up a hard landing.