The Journal. - Why a Soft Landing for the Economy Could Be Hard

Episode Date: September 20, 2023

Federal Reserve officials voted to hold interest rates steady at a 22-year high but signaled they were prepared to raise rates once more this year to combat inflation. WSJ's Nick Timiraos explains the Fed’s “soft landing” goal of lowering inflation without crashing the economy. Further Reading: - Fed Holds Rates Steady but Pencils in One More Hike This Year  - Why a Soft Landing Could Prove Elusive  Further Listening: - Will the Fed Stop Raising Interest Rates  - Homeowners Don’t Want to Sell. So Builders Are Cashing In.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Since last year, the Fed's been trying to stop prices from rising. And it's kind of done that. Now, the Fed is trying to keep inflation low without causing a recession. Something that's known as a soft landing. Well, hopes of a soft landing pull into view. A possibility of a soft landing. Soft landing. Soft landing. Well, hopes of a soft landing pull into view. A possibility of a soft landing. Soft landing. Soft landing. A soft landing requires that the Fed not land the plane nose down. Our colleague Nick Timoros covers the Fed. And I asked him,

what do economists mean when they say soft landing? mean when they say soft landing? Soft landing is where you bring inflation down, you slow the economy down without a big increase in unemployment, really without a recession. How hard is it to do that? Well, soft landings are rare. They're rare for a reason. It's very hard to do that. If you look back since World War II, there's really only one time that you could conclusively say that we've had a soft landing. The way the Fed tries to achieve a soft landing is with interest rates. And a sign that it's trying to land the plane

is when it stops raising rates. Like today. The Fed held rates steady, but said there could be one more rate hike this year. So the question is, can the Fed pull off a soft landing? Someone who's a pilot said to me on Friday, this is like trying to land on a soft field. It's very dangerous to attempt to land on a grass field or something like that. You don't know if there's been rain and you're going to, you know, break an axle on the plane's

landing gear because you don't know what the plane's going to hit. And so that's kind of, if you want to go overboard with the aviation analogies, that's kind of what they're doing here is they're trying to land somewhere. And we've never really tried to land a plane like this before. they're doing here is they're trying to land somewhere, and we've never really tried to land a plan like this before. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Wednesday, September 20th. Coming up on the show, will the Fed be able to land the plane? Can't get a well-groomed lawn delivered, but you can get chicken parmesan delivered. Sunshine? No. Some wine? Yes. Get almost, almost anything delivered with Uber Eats. Order now.

Alcohol in select markets. See app for details. So, the latest news coming out of the Fed is that they're going to hold interest rates steady. Why? And what does this say about the U.S. economy? Well, they're holding interest rates steady because they're not really sure if they're going to have to raise rates again to slow down the economy, but they don't think they have to do that right now. So there are certain times where it's obvious what you need to do. Last year, it was obvious that inflation was very high and interest rates were very low. So the Fed was just racing to try to get things into better balance.

Now, it's a much harder economy to read. You've done a lot. You've raised interest rates a lot. But the economy is still growing probably faster than a lot of economists thought would be possible. What is the Fed trying to achieve at this moment? Well, ultimately, the Fed, they are trying to achieve a soft landing. You know, the Fed has two goals, low and stable inflation and maximum employment. And so those goals tell them, try to bring inflation down

without forcing millions of people to lose their jobs. And so that's what they're shooting for. But it's awfully difficult to do that when inflation has been as high as it's been. Where does the phrase soft landing come from? The soft landing term cropped up in the early 1970s, and it was lingo that Nixon administration officials were using after the moon landing in 1969. Tranquility Base here. The Eagle has landed.

This idea that you could touch down just softly, you didn't want to fail to land on the moon, but you didn't want to drive the lunar module smash into the center of the rock. drive the lunar module smash into the center of the rock. Okay, so the Fed has tried to do this in the past. Has it ever worked? The one time that the Fed did achieve a soft landing was in the mid-1990s. They raised interest rates very aggressively. And then they stopped in 1995, and they actually cut interest rates a few times later in 95, early in 1996. And the economy, the expansion went on for another four or five years. So yes, that was a textbook example of a soft landing. Inflation was not a

problem in the 1990s, and we had a very good labor market. Right. So many things are different, right? I mean, Taylor Swift isn't number one. Back then, it was, let's see, Gangster's Paradise. There you go. Waterfalls, TLC. You remember. I'm old enough to remember the 1990s. And so people think the elusive soft landing could be achievable this time? You've seen a lot more euphoria about a soft landing over the last couple of months. And that is because inflation has been coming down without a big increase in the jobless rate so far. But the Fed chairman, Jerome Powell,

has warned that the U.S. economy is still in a tricky spot. As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk management considerations are critical. What are the main threats

that you see right now and that people at the Fed see in terms of keeping the U.S. from achieving the soft landing? Well, to achieve a soft landing, a lot has to go right at a time when a lot could go wrong. So I think the first obstacle to a soft landing is really from the Fed itself. The first obstacle to a soft landing is really from the Fed itself. So if the Fed were to hold interest rates too high for too long, that could make the downturn maybe worse than it needs to be. How long is too long and how high is too high? Ask me six months after the recession, right?

I mean, you don't know these things in real time. The job of monetary policy is very difficult in a situation like the one that we're in right now. When everybody who wants to have a job can get a job and wage pressures are rising, then anything that boosts demand could stoke inflation. So while the Fed has succeeded in lowering inflation from its highs last year, the economy is still running hot, which has economists worried that inflation could pick back up again. I mean, the economy looks pretty good right now. If you just look at consumer spending,

consumers were spending this summer, people were traveling, spending money on concerts and movies and, you know, catching up on all the things they weren't able to do during the pandemic. Taylor Swift. Yeah, Taylor Swift and Barbie. And, you know, there's been a lot made of that. And for good reason. This is, you know, the consumer has been strong. You know,

you had asked about what are the risks to a soft landing. One of the risks is that the economy is just too strong. And the Fed, which wants to put the economy, you know, into a slower growth phase here, If you think about what a traditional growth rate for the U.S. economy is estimated to be around 2%. If we're going above 2%, the Fed's going to be concerned that that's going to cause more of an inflation problem. So every time you see growth running hotter than 2%, which it has been this summer, that raises the risk of the Fed says, well, maybe we need to do a little bit more. Maybe we need to raise rates again once or twice.

And there are more factors outside of the Fed's control that could interfere with a soft landing. That's next. The End It has the crispy, juicy, tender chicken you love, topped with crispy jalapenos and a super tasty sweet and spicy sauce. You'll wish this spectacle of flavor never ended. Try the new Firecracker McCrispy today at participating McDonald's restaurants. Are you Dave, a claims-free hybrid-driving university grad who signed up online? Well, Dave, this jingle's for you. Who saves with TD Insurance? Because he's a claims-free hybrid-driving university grad who signed up online.

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there are things outside its control that can interfere with a soft landing. Nick says the biggest one is oil prices. If oil prices were to go up a lot, then that would be a serious problem. If you think about diesel fuel, that is in a lot of the things we consume. You go to a meal at a restaurant, that food got to your table

because it was probably in a truck powered by diesel. And so if oil prices rise, they've been rising for the last few weeks. And if they were to continue to rise, that could cause concerns in two directions. One would be higher gas prices are going to sap consumer spending. So that's actually something that would hurt growth. But it's also something that could drive prices up because oil prices feed into so many of the other things that are sold across the economy. You know, if you're thinking about what might be sitting on the runway interfering with the plane as it comes down, well, oil prices would be at the top of that list. And what else is on that list?

Well, you know, there's also the risk of a financial market mishap. Something could go wrong in the financial market that creates maybe a bigger pullback in lending. The Fed is trying to slow down lending, but they're trying to do it in sort of a manageable, controllable, orderly way. And we saw back in March with the failure of Silicon Valley Bank that sometimes that isn't the case. If people are worried about whether their money is safe at the bank, that can start bank runs. That's exactly the sort of thing that you might have been worried about, that you raise interest rates a lot and you kick off something. You kind of kick some hornet's nest that you weren't anticipating.

So I think for a lot of people, there's a worry about the unknown unknowns. What's the thing lurking out there that you're not really going to figure it out until you get interest rates up as high as you have? And then these things sort of start to unravel. get interest rates up as high as you have, and then these things sort of start to unravel. But financial market cataclysm, that's been a worry, I think, for a lot of analysts for some time. Financial market cataclysm sounds extreme. Well, you know, you've had an extremely large rise in interest rates. So we don't really know how financial markets are going to digest all of this. Step back and think about the last 15 years. For most of the last 15 years, interest rates were very low.

And so a lot of people said, all right, lower for longer. That was the mantra on Wall Street. Interest rates are going to be lower for longer. And when you make decisions thinking that interest rates are never going to get above 3% again. And then here we are, interest rates are near 5.5%. And now people are talking about higher for longer. Interest rates aren't going to come back down anytime soon. Well, all of those products that you structured, those decisions that you made thinking interest rates would never get above 3%, and now we're talking about interest rates staying near six for a long time, that's what I'm talking about when I say financial market cataclysm. There could be some sort of crack-up that is just, you know, it's going to look obvious in hindsight,

but that would be a risk right now to a soft landing for sure. Now, we're talking about a soft landing, which is like, I think, the dream. Is that right? That's the dream. That's nirvana. And then there's like the crash landing, which is the nightmare. Right. Is there something in the middle? Yeah. The Fed chair, Jay Powell, has talked in the past about a soft-ish landing. Jay Powell has talked in the past about a soft-ish landing. You know, there are a number of plausible paths to having a soft or, as I've said, soft-ish landing. And I asked him once, well, what do you

mean by that? So, Chair Powell, I heard you refer to a soft-ish landing. And I want to ask, I mean, what's the difference between a soft landing and a soft-ish landing? Because if the pilot tells me, don't worry, we're going to have a soft-ish landing, I don't know, I start to wonder what he's talking about. Well, so you fly around. You know, sometimes the landing is just perfect, right? And sometimes it's just a little bumpy. And so it's still a good landing. You don't even notice it, right?

And, you know, there's an idea here that maybe there's going to be a recession, but it could be mild. If you look back over history, even some of the quote-unquote mild recessions we've had have been pretty painful. When you have the unemployment rate go up by a point, you're talking about millions of people losing their jobs, millions of people not being able to find work very quickly. So a mild recession might sound to some people like an oxymoron. But some economists talk about this idea where you could have rolling recessions. It's not an economy-wide recession, but last year the housing market was maybe flirting with a recession. The freight market, goods production for certain industries, CEOs of those companies

will tell you we were in a recession. And so if you were able to have it sort of staggered across the economy, when one thing's turning back down and other things coming back up, then maybe you're able to find some sort of, you know, miracle soft-ish landing here. When will we know if the Fed has made a successful soft landing? You know, it could be another year. It could be another year and a half. So, you know, let's record another one of these in October of 2024, and we can start to see if maybe the soft landing has taken hold or not. Can we talk before then?

There'll be plenty to talk about before then. I promise you that, Kate. That's all for today, Wednesday, September 20th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.