0:05

Since last year, the Fed's been

0:07

trying to stop prices from rising,

0:10

and it's kind of done that. Now

0:13

the Fed is trying to keep inflation low

0:16

without causing a recession, something

0:18

that's known as a soft landing.

0:22

Well, hopes of a soft landing pull into view. A

0:25

possibility of a soft landing. Soft

0:27

landing. Soft landing.

0:28

Soft landing requires that

0:30

the Fed not land the

0:33

plane nose down.

0:34

Our colleague Nick Timoros

0:36

covers the Fed, and I asked

0:38

him, what do economists mean when they

0:41

say soft landing?

0:42

Soft landing is where you bring

0:45

inflation down, you slow the

0:47

economy down without

0:50

a big increase in unemployment, really

0:52

without a recession.

0:54

How hard is it to do that?

0:57

Well, soft landings are rare. They're

1:00

rare for a reason. It's very hard to do that.

1:02

If you look back since World

1:04

War II, there's really only one time

1:06

that you could conclusively

1:09

say that we've had a soft landing.

1:11

The way the Fed tries to achieve

1:13

a soft landing is with interest rates. And

1:16

a sign that it's trying to land the plane is

1:19

when it stops raising rates. Like

1:21

today, the Fed held

1:23

rates steady, but said there could be

1:26

one more rate hike this year. So

1:28

the question is, can the

1:30

Fed pull off a soft landing?

1:35

Someone who's a pilot said to me on Friday, this

1:38

is like trying to land on a soft field.

1:41

It's very dangerous to attempt to land on

1:43

a grass field or something like that. You don't know

1:45

if there's been rain and you're going to

1:48

break an axle on the plane's landing gear

1:50

because you don't know what

1:52

the plane's going to hit.

1:54

And so that's kind of, if you want to

1:56

go overboard with the aviation

1:58

analogies, that's kind of what they're doing

2:00

here is they're trying to land somewhere and we've

2:02

never really tried to land a plan like this before.

2:08

Welcome to the Journal, a

2:10

show about money, business, and

2:12

power. I'm Kate Leimbaugh.

2:14

It's Wednesday, September 20th.

2:21

Coming up on the show, will

2:23

the Fed be able to land

2:25

the plane?

2:42

So the latest news coming

2:45

out of the Fed is that they're gonna

2:47

hold interest rates steady.

2:50

Why?

2:51

And what does this say about the US economy?

2:54

Well, they're holding interest rates steady

2:56

because they're not really sure if

2:59

they're gonna have to raise rates again to slow

3:01

down the economy, but they don't think

3:03

they have to do that right now. So

3:07

there are certain times where it's obvious what

3:09

you need to do. Last year it was

3:12

obvious that inflation was very high

3:14

and interest rates were very low, so

3:16

the Fed was just racing to try to get

3:18

things into better balance. Now

3:21

it's a much harder economy to read.

3:24

You've done a lot. You've raised interest rates a

3:26

lot, but the economy is still

3:29

growing probably faster than

3:31

a lot of economists thought would be possible. What

3:34

is the Fed trying to achieve

3:36

at this moment? Well, ultimately

3:39

the Fed, they are trying to achieve a soft landing.

3:41

You know, the Fed has two goals, low and

3:43

stable inflation and maximum employment.

3:46

And so those goals

3:48

tell them try to bring inflation

3:50

down without forcing millions of people

3:52

to lose their jobs. And so that's what they're

3:54

shooting for, but it's awfully difficult

3:57

to do that when inflation

3:58

has been as high as it's been. Where

4:01

does the phrase soft landing come from?

4:04

The soft landing term cropped

4:06

up in the early 1970s, and

4:08

it was lingo that Nixon administration

4:11

officials were using after the moon landing

4:14

in 1969.

4:15

Tranquility base here. The Eagle has

4:18

landed.

4:18

This idea that you could touch

4:21

down just softly. You didn't want to fail to land

4:23

on the moon, but you didn't want to drive the lunar

4:26

module smash into the center

4:28

of the rock.

4:31

Okay, so the Fed has tried

4:34

to do this in the past. Has

4:36

it ever worked?

4:38

The one time that the Fed

4:40

did achieve a soft landing was in the

4:42

mid-1990s. They raised

4:44

interest rates very aggressively, and

4:46

then they stopped in 1995,

4:49

and they actually cut interest rates

4:51

a few times later in 1995, early in 1996. And

4:56

the economy, the expansion went on

4:59

for another four or five

5:01

years. So yes, that was a textbook

5:03

example of a soft landing.

5:06

Inflation was not a problem in

5:08

the 1990s, and we had a very good

5:11

labor market.

5:12

Right. So many things are different,

5:14

right? I mean, Taylor Swift isn't number one.

5:16

Back then, it was, let's see,

5:20

Gangster's Paradise. There you go. Waterfalls,

5:22

TLC.

5:24

You remember. I'm old enough to

5:26

remember the 1990s.

5:29

And so people think the elusive

5:31

soft landing could be achievable this time?

5:35

You've seen a lot more euphoria

5:37

about a soft landing over the last couple

5:39

of months, and that is because inflation

5:42

has been coming down without

5:44

a big increase in the jobless rate so

5:46

far.

5:48

But the Fed chairman Jerome Powell

5:50

has warned that the U.S. economy

5:52

is still in a tricky spot. As

5:55

is often the case, we are navigating by

5:57

the stars under cloudy skies. such

6:00

circumstances, risk management considerations

6:02

are critical. What

6:05

are the main threats that you

6:07

see

6:08

right now and that people at the Fed

6:10

see in terms of keeping the

6:12

U.S. from achieving the soft

6:15

landing?

6:16

Well, to achieve a soft landing,

6:18

a lot has to go right at

6:21

a time when a lot could go wrong.

6:24

So I think the first obstacle to a soft

6:26

landing is really from the Fed itself. So

6:29

if the Fed were to hold interest rates too high

6:32

for too long, that could make

6:34

the downturn maybe worse than it

6:37

needs to be.

6:38

How long is too long and how high is too high?

6:41

Ask me six months after the recession,

6:43

right? I mean, you don't know these things in real

6:45

time. The job of monetary policy is

6:48

very difficult in a situation like

6:51

the one that we're in right now. When

6:53

everybody who wants to have a job can get a job

6:56

and wage pressures are rising, then anything

6:58

that boosts demand could show inflation.

7:01

So while the Fed has succeeded in lowering

7:04

inflation from its highs last year, the

7:07

economy is still running hurt, which

7:09

has economists worried that inflation

7:12

could pick

7:12

back up again.

7:16

I mean, the economy looks pretty good right

7:18

now. If you just look at consumers spending,

7:20

consumers were spending this summer, people were

7:22

traveling, spending money on concerts and movies

7:24

and catching up on all the things

7:26

they weren't able to do during the pandemic. Taylor

7:29

Swift. Yeah, Taylor Swift and Barbie. There's

7:31

been a lot made of that and for good reason. The

7:34

consumer has been strong. You

7:37

had asked about what are the risks to

7:39

a soft landing. One of the risks is that the

7:41

economy is just too strong. The

7:43

Fed, which wants to put the economy

7:46

into a slower growth

7:48

phase here, if you think about what a traditional

7:51

growth rate for the US economy is

7:53

estimated to be around 2%. If

7:55

we're going above 2%, the Fed's going to

7:57

be concerned that's going to cause more inflation

8:00

problem. So every

8:03

time we see growth running hotter

8:05

than 2%, which it has been this summer,

8:08

that raises the risk of the Fed says, well, maybe

8:10

we need to do a little bit more, maybe we need to raise rates again,

8:13

once or twice. And

8:15

there are more factors outside

8:18

of the Fed's control that could interfere

8:20

with a soft landing. That's

8:23

next.

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9:12

While the Fed can influence the US economy

9:14

through interest rates, there are things

9:17

outside its control that can interfere

9:19

with a soft landing. Nick

9:21

says the biggest one

9:22

is oil prices.

9:24

If oil prices were to go up a lot, then

9:27

that would be a serious problem.

9:30

If you think about diesel fuel, that is

9:32

in a lot of the things we consume. You

9:35

go to a meal at a restaurant, that food got

9:37

to your table because it was probably in a truck

9:39

powered by diesel. And so

9:42

if oil prices rise,

9:44

they've been rising for the last few weeks. And if

9:46

they were to continue to rise, that could cause

9:48

concerns in two directions.

9:51

One would be higher gas prices are

9:53

going to sap consumer spending. So that's actually

9:56

something that would hurt growth. But

9:59

it's also. thing that could drive prices

10:01

up because oil prices

10:04

feed into so many of the other things that

10:07

are sold across the economy.

10:10

If you're thinking about what might

10:12

be sitting on the runway interfering

10:15

with the plane as it comes down, well, oil

10:17

prices would be at the top of that list.

10:23

And what else is on that list?

10:26

Well, there's also the risk

10:28

of a financial market mishap.

10:31

Something could go wrong in the financial market that creates

10:33

maybe a bigger pullback in lending. The

10:35

Fed is trying to slow down lending, but

10:37

they're trying to do it in a manageable,

10:40

controllable, orderly way.

10:43

And we saw back in March with the failure

10:45

of Silicon Valley Bank that sometimes that

10:47

isn't the case. If people are worried about

10:50

whether their money is safe at the bank, that

10:52

can start bank runs. That's

10:54

exactly the sort of thing that you might have been worried

10:56

about, that you raise interest rates a lot and you kick

10:58

off something. You kind of kick some hornet's

11:00

nest that you weren't anticipating. So

11:03

I think for a lot of people, there's a worry about

11:05

the unknown unknowns. What's

11:09

the thing lurking out there that you're

11:11

not really going to figure it out until you get interest

11:14

rates up as high as you have? And then these

11:16

things sort of start to unravel. But

11:19

financial market cataclysm, that's

11:22

been a worry, I think, for a lot of analysts

11:24

for some time.

11:25

Financial market cataclysm sounds

11:28

extreme.

11:29

Well, you know, you've had

11:31

an extremely large rise in interest rates. So

11:35

we don't really know how financial

11:38

markets are going to digest all of this. Step back and

11:40

think about the last 15 years. For

11:42

most of the last 15 years, interest

11:45

rates were very low. And so a lot of people

11:47

said, all right, lower for longer. That

11:49

was the mantra on Wall Street. Interest rates are going to be

11:51

lower for longer. And when you make

11:53

decisions thinking that interest rates

11:56

are never going to get above 3% again, and

11:58

then here we are. rates are near five and

12:00

a half percent and now people are talking

12:03

about higher for longer. Interest rates aren't going

12:05

to come back down anytime soon. Well

12:07

all of those products that you structured,

12:10

those decisions that you made thinking interest

12:12

rates would never get above three and now

12:14

we're talking about interest rates staying near six

12:17

for a long time, that's what

12:19

I'm talking about when I say financial market cataclysm.

12:21

There could be some sort of crack-up

12:24

that is just, you know, it's gonna

12:26

look obvious in hindsight but that would be a risk

12:29

right now to a soft landing for sure. Now

12:35

we're talking about a soft landing which

12:38

is like I

12:38

think the dream,

12:39

is that right?

12:41

That's the dream, that's Nirvana.

12:43

And then there's like the crash landing

12:46

which is the nightmare. Right.

12:49

Is there

12:50

something in the middle?

12:52

Yeah the Fed chair Jay Powell has

12:54

talked in the past about a soft ish

12:56

landing. You know there are a number of plausible

12:59

paths to having

13:01

a soft or as I've said soft

13:03

ish landing. And

13:05

I asked him once well what do you mean by that? So

13:07

chair Powell I heard you refer to a soft ish landing

13:10

and I want to ask I mean what's the difference between a soft

13:12

landing and a soft ish landing?

13:14

Because if the pilot tells me don't worry

13:17

we're gonna have a soft ish landing I don't

13:19

know I start to wonder what he's talking about. Well

13:23

so you fly around you know sometimes the landing

13:26

is just perfect right? And

13:28

sometimes it's just a little bumpy

13:31

and so it's still a good landing you don't

13:33

even notice it right? And

13:36

you know there's an idea here that

13:38

maybe there's going to be a recession but it could

13:40

be mild. If you look back over history

13:43

even some of the quote-unquote mild recessions

13:45

we've had have been pretty painful

13:48

when you have the unemployment rate go up by a point you're

13:50

talking about millions of people losing their jobs

13:52

millions of people not being able to find work very quickly.

13:56

So a mild recession might

13:58

sound to some people like an accident.

14:01

But some economists

14:03

talk about this idea where you could have rolling recessions.

14:06

It's not an economy-wide recession, but

14:09

last year the housing market was maybe flirting

14:12

with a recession. The freight market, goods

14:14

production for certain industries, CEOs

14:17

of those companies will tell you we were in a recession.

14:20

And so if you were able to have it sort of staggered

14:23

across the economy when one

14:25

thing's turning back down and other things

14:27

coming back up, then maybe

14:29

you're able to find some sort of miracle

14:33

softish landing here.

14:35

When will we know if

14:37

the Fed has made a successful

14:39

soft landing?

14:41

It could be another year. It could

14:43

be another year and a half. So

14:46

let's record another one of these in October

14:50

of 2024, and we can start

14:52

to see if maybe the

14:54

soft landing has taken hold or not. Can

14:57

we talk before then? There'll

14:59

be plenty to talk about before then. I

15:01

promise you that, Kate.

15:14

That's all for today, Wednesday,

15:16

September 20. The Journal

15:19

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15:21

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15:29

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