Even the 1984 soft landing may give false comfort regarding the prospects of a soft landing over the next few years. The economic backdrop back then was entirely different from today. In 1984, the unemployment rate was 7.5 percent, well above the Congressional Budget Office’s estimate of a “neutral” or full employment rate of unemployment, as the chart below shows. Hence, the Committee had more justification for focusing on risks to growth, which a read-through of meeting documents from that time period suggests were quite elevated.3 The 1984 pivot also occurred before the era of central bank inflation targeting, giving the Fed more flexibility in balancing growth and inflation risks.
Figure 2: Soft Landings: Economic Conditions When the FED Stopped Tightening
None of this is to say that a recession is imminent, or even “baked in the cake”. In fact, while the slope of the 2- to 10-year Treasury yield curve is on the verge of inverting, the front of the Treasury curve remains quite steep, suggesting limited recession risks for the next 12 to 18 months. But unless inflation moderates significantly over this period, the path to a soft landing beyond then will become increasingly narrow.
Figure 3: Near-Term Forward Treasury Spread
1. Jerome Powell (2022), “Restoring Price Stability,” speech delivered at “Policy Options for Sustainable and Inclusive Growth,” 38th Annual Economic Policy Conference, National Association for Business Economics, March 21.
2. Based on 104 monthly observations from 1958 through 2019 where the economy was in an expansion, year-over-year core CPI inflation was at or above four percent, and the policy rate was higher than six months prior.
3. For example, the record of policy actions at the October 2, 1984 meeting, at the start of the pivot towards an easier policy stance, noted weaker consumer spending, a sharp fall in household employment, a cooling housing market, slower business fixed investment, and concerns over dollar appreciation. While inflation was high, it was well off the extreme levels seen earlier in the decade, and Committee members were encouraged by underlying trends, including lower inflation expectations.
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