Analysis | Why Fed Aim Is ‘Growth Recession,’ a Not-Soft Landing


Federal Reserve Chair Jerome Powell and his colleagues are trying to use higher interest rates to bring down sky-high inflation without crashing the US into a recession. Their initial goal was what economists call a soft landing, but that’s become harder since Russia’s invasion of Ukraine set off shocks in global energy, commodity and financial markets. Powell now seems to be aiming instead for something more painful that’s known by the paradoxical name of a “growth recession.”

1. What’s a soft landing?

It’s when a central bank can slow the economy enough to curb demand and rein in inflation, but not so much as to trigger a contraction in gross domestic product and a rise in unemployment. Doing that takes a combination of smart policy making and luck.

2. What’s a growth recession? 

It’s a protracted period of meager growth and rising unemployment, a situation where the economy expands more slowly than its roughly 1.5% to 2% long-term trend but an outright contraction is avoided.  The late New York University economist Solomon Fabricant coined the term “growth recession” in research published in 1972. While such a scenario may not be as costly as an actual contraction, it poses dangers for the economy nonetheless, he suggested: A tiger contained “is not the same as a tiger loose in the streets, but neither is it a paper tiger,” he wrote. 

3. Why the change in goals? 

Powell has seemingly concluded that it will take a tiger — and not just a soft landing — to attack America’s pernicious inflation, which is more than triple the Fed’s 2% target. In an Aug. 26 speech at the Fed’s annual conference in Jackson Hole, Wyoming, he said the labor market was “clearly out of balance,” with the demand for workers substantially exceeding the supply. That’s led to rapid wage rises that are incompatible with the Fed’s 2% inflation target. “Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said.  “Moreover, there will very likely be some softening of labor market conditions” — widely seen as a euphemism for higher unemployment.

4. What is the Fed doing? 

It started raising interest rates in March, and by the start of September had increased the ceiling of the rate it uses to manage the economy from 0.25% to 2.5%, including two unusual increases of 75 basis points each. Higher interest rates slow economic activity and growth by making borrowing more expensive. Slower growth leaves consumers with less to spend and makes businesses more apt to fire than to hire. The hope is that reducing consumer demand will slow price increases while weakening demand for labor will keep wages from going up at a pace likely to feed inflation. 

5. Has the Fed ever accomplished a soft landing?

Arguably once, in 1994-1995. Under then-Chair Alan Greenspan, the central bank doubled interest rates to 6% and succeeded in slowing economic growth without killing it off. The tighter credit did have adverse consequences, though. It led to huge losses for bond market investors and contributed to the 1994 bankruptcy of Orange County, California. Mexico was also compelled to seek a bailout from the US and the International Monetary Fund.

6. Has every other attempt been a failure?

Not quite. Alan Blinder, who was Fed vice chair for the 1994-95 soft landing, says the central bank has achieved some other “pretty soft” landings during the past half-century. One came in 2001, when Fed rate increases that began two years earlier brought about an exceedingly mild, eight-month downturn — what Blinder calls a “recessionette.” Powell has suggested he thought that the Fed was on course for a soft landing in 2020, when the US economy looked set to extend a record-long expansion after a series of rate moves. But then economic activity came to a halt due to the pandemic.

7. What are the Fed’s chances of avoiding recession?

Critics argue that the Fed waited too long to address price pressures that began mounting in 2021 by insisting for months that those inflationary forces would prove to be “transitory.” Now that the Fed is playing catch-up — it’s raising interest rates faster than at any time since the early 1980s — slowing the economy down enough to push up joblessness without tipping the economy into recession will take some luck. A weak economy that’s barely growing is much more likely to be knocked off course by an unexpected shock, like a renewed run-up in oil prices..

8. Why was the Fed slow off the mark?

It was partly by design. After years of falling short of its 2% inflation target, the Fed adopted a new monetary regime in August 2020 under which it forswore taking preemptive action against inflation. Instead, it promised not to lift rates from near zero until inflation had hit 2% — and was poised to exceed that level moderately for some time – and the economy had returned to full employment. At a Senate Banking Committee hearing in March, Alabama Republican Richard Shelby and Nevada Democrat Catherine Cortez Masto pushed him to agree the Fed had flubbed it by not being quicker to tackle rising prices. In a rare admission for a Fed chair, Powell said that “hindsight says we should have moved earlier.”

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