Hard Landing
AdvancedA hard landing is when efforts to slow an overheating economy, usually by raising interest rates, lead to a sharp slowdown or recession, with falling output and rising unemployment.
When central banks raise interest rates to fight inflation, they aim to cool demand gradually. If they tighten too much, or if other shocks occur at the same time, the economy may slow more sharply than intended.
A hard landing typically involves falling output, rising unemployment, declining business investment and weaker consumer spending. It may bring inflation down, but at a significant cost.
For example, in the early 1980s, the US Federal Reserve raised interest rates to very high levels to defeat double-digit inflation. Inflation fell dramatically, but the economy suffered a deep recession with unemployment above 10%.
The term is also used for rapidly growing economies that slow abruptly, for example if a property or credit boom ends suddenly. The risk of a hard landing is one reason central banks often prefer to raise interest rates gradually and communicate their plans clearly, giving households and businesses time to adjust.
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