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The Fed's mission improbable: Beating inflation without causing a recession

Federal Reserve Board Chairman Jerome Powell.
Mark Wilson
Getty Images
Federal Reserve Board Chairman Jerome Powell.

The U.S. Federal Reserve has a delicate job in front of it — pumping the brakes on the economy in such a masterful way that it achieves what is known as a "soft landing."

Basically, the central bank is trying to curb demand and bring prices under control without tipping the economy into recession.

But cracking down on sky-high inflation is already turning out to be a tough task. The Fed's top policymakers later this week are expected to raise interest rates for the fourth time in five months. They have moved more aggressively than expected at the beginning of the year.

Fed chair Jerome Powell has recently suggested that a "softish" landing for the economy is possible.

But history suggests achieving that perfect landing is easier said than done.

So, what exactly is a soft landing?

Like a pilot gently landing an airplane, it takes a deft touch on the throttle to avoid an economic stall.

"The Fed slows the economy down by raising interest rates, which cuts spending," says Princeton economist Alan Blinder. "If you do too much of that, you're going to get a recession."

Blinder was vice chairman at the Federal Reserve in the 1990s, when the central bank engineered the perfect "soft landing." Between 1994 and early 1995, the Fed raised its benchmark interest rate from 3% to 6%. While economic growth did slow down, GDP never shrank and the job market remained strong, with unemployment actually declining.

What's the Fed's track record?

Oftentimes, however, the landing for the economy is bumpy.

"We've had 13 or 14 recessions since World War II, and more than two-thirds of those recessions were caused by the Fed raising the interest rate faster than the economy can handle," University of Chicago economist Austan Goolsbee told Weekend Edition Sunday.

And many forecasters worry that in its effort to control today's high inflation, the Fed could tip the economy into recession.

But Blinder is somewhat more optimistic, using history as a guide. He's looked closely at the 11 periods between 1965 and 2020 in which the Fed raised interest rates. While the perfect soft landing happened only once, the economic fallout in six of the other cycles was limited with little or no decline in GDP and only a modest rise in unemployment.

"The moral of the story to me was, softish landings are not as rare as was thought," Blinder says.

Five other periods of interest rate hikes were followed by severe recessions. But in three of those cases, Blinder argues the central bank wasn't even trying for a soft landing — including the draconian rate hikes under former Fed chairman Paul Volcker in the late 1970s and early '80s when he was wrestling with inflation in the double digits.

Two other recessions were arguably unrelated to the Fed's actions, including the pandemic downturn of 2020.

"In addition to skill," Blinder says, "you need to be lucky."

What's working against the Fed right now?

The Fed is facing some severe crosswinds, which make its job of curbing inflation more difficult. The pandemic combined with Russia's invasion of Ukraine have caused severe supply disruptions, which are driving up prices.

Powell says he still sees a path to a soft landing. But he acknowledges, it's not entirely under the central bank's control.

"It's not getting easier," Powell told reporters last month. "It's getting more challenging because of these external forces."

Some unemployment can be tolerated by the economy, but painful for those that lose jobs

One of the main things the central bank has going for it is a strong job market currently, so a modest uptick in unemployment might be more tolerable than it would under other circumstances.

Powell has said if the cost of curbing inflation is a half-percentage point increase in unemployment — from June's rate of 3.6% to 4.1% — he would consider that a successful outcome, and a softish landing.

"We don't seek to put people out of work," Powell said. "But we also think that you really cannot have the kind of labor market we want without price stability."

Blinder agrees, noting that the unemployment rate soared above 10% during Volcker's deliberately hard landing of the early 1980s.

"Those are kind of horrific unemployment rates," Blinder says. "And I certainly don't believe that the Powell Fed, first of all, has to do anything like that or wants to do anything like that."

Blinder cautioned, however, any increase in unemployment is painful for the people affected.

"To the people that lose their jobs," he said, "this is not soft at all."

Copyright 2022 NPR. To see more, visit https://www.npr.org.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.

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