Soft Landing

When inflation rises because demand is too strong, central banks raise interest rates to cool the economy. The challenge is to slow growth enough to reduce inflation without pushing the economy into a downturn with rising unemployment.

A soft landing is achieved when growth slows gradually, inflation returns towards its target and unemployment stays relatively low. It is often compared to a pilot bringing a plane down smoothly.

For example, the US economy in the mid-1990s is often cited as a soft landing: the Federal Reserve raised interest rates in 1994 and 1995, inflation stayed low and the economy continued to grow without a recession.

Soft landings are difficult because monetary policy works with long and uncertain delays, and policymakers must rely on imperfect data. Raising rates too much or too quickly can cause a hard landing, a recession. Raising them too little can leave inflation high. Whether a soft landing has occurred is often clear only in hindsight.