Another edition of our new series: Blog Spotlight.
We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
Up next in our Blogger Spotlight: Kash Mansori teaches economics at Salem College, in North Carolina. In addition to teaching at small liberal arts colleges, Kash also enjoys research and writing on current topics in finance, macroeconomics, politics, and public policy. His blog, The Street Light, has a tendency to illustrate his fondness for charts and graphs. And yes, Kash is this economist’s real name.
Today’s focus commentary looks at: The Previous ‘Soft Landing’
Has the Fed managed to raise interest rates by
exactly enough to bring the US economy down to a "soft landing"? There was
substantial disagreement among economists about Friday’s
GDP report, with some arguing that it was a harbinger of a looming recession,
while others argued that it was still consistent with the soft landing scenario,
really contain anything to worry about.
We won’t know which camp was
closer to the truth for many months. But in the mean time, I can’t help but be
reminded of the discussions happening among economy-watchers in mid- to
late-2000. The situation in 2000 was somewhat similar to today’s economy in some
ways; in particular, the Fed had been raising interest rates for some time in an
attempt to cool the economy and bring down incipient inflation without pushing
the economy into a recession, and many observers were of the opinion that they
had succeeded. To help refresh your memory, here are some excerpts from the news
at the time (sorry, I haven’t tracked down links):
August 10, 2000
Economy Slowing for ‘Soft
Landing; Fed Reports Braking in Key Growth Areas: The hard-charging US
economy slowed in the late spring and early summer, the Federal Reserve reported
yesterday, suggesting a "soft landing" for the 10-year expansion indeed could
replace the traditional boom-and-bust dynamic…
The Washington Post
Economic Growth Gradually Slowing; Reports May Reduce
Chance of Rate Hike: More clearly than ever, three new economic reports
out yesterday show the U.S. economy coming in smoothly for a soft landing. A
series of increases in short-term interest rates by the Federal Reserve and
other forces have combined to slow economic growth just enough to keep inflation
largely at bay without significantly raising the risk of a recession.
reports all pointed in that direction, according to a number of analysts, who
also said the way events are unfolding suggests that Fed policymakers won’t be
raising rates again anytime soon.
September 18, 2000
The Wall Street Journal
Economic Data Continue to Augur Soft Landing:
October 28, 2000
Economy Cools to Rate
Suggesting Soft Landing: The economy shifted into a much lower gear
during the summer, registering its slowest speed in more than a year and
reflecting a drop in government spending and weaker business investment… "We
have downshifted … but we’re not on the brink of a recession," said Paul
Kasriel, chief economist for Northern Trust Co. The report, he said, is
consistent with the Federal Reserve’s desire to bring the high-flying economy
down to a more sustainable rate of growth.
October 29, 2000
The Atlanta Journal and Constitution
Stock market fall hurts, but ‘soft landing’
November 27, 2000
This Political Shock Won’t Upset the Soft
Landing: THE FED SEEMS CONTENT that the slowdown is leading toward the
desired soft landing, although policymakers are still not convinced that the
threat of rising inflation is abating. After hiking its overnight rate from
4.75% in June, 1999, to 6.5% in May, 2000, the Fed at its Nov. 15 policy meeting
continued to leave interest rates unchanged. The Fed admitted that the economy
could slow to a pace even below its long-run trend, generally taken to be 3.5%
or so. However, it said that the slowdown in demand to date has not been
sufficient to alter its view that the risks in the outlook are weighted toward
conditions that could generate higher inflation.
…The bottom line is
that, yes, the economy is slowing as the Fed’s efforts to pull off a soft
landing bear fruit. And little indicates that this nation’s ongoing political
shock will rattle the economy, especially since the fundamentals remain quite
sturdy. The Greenspan Fed pulled off a soft landing in 1994, and it will very
likely succeed again in 2001 — regardless of how long it takes to elect a
Dec 7th, 2000
Slowing down, to
what?: The latest economic figures are consistent with a soft landing. As
Mr Greenspan made plain in his speech, an economic slowdown is what the Fed has
been aiming to achieve by raising interest rates six times in the past 18
months. By creating economic slack, this should stop inflation rising further.
And despite the share-price jump this week, recent market edginess will usefully
remind investors about risk and so deter reckless investment.
are also right that few economists are actually predicting a hard landing. The
average forecast for growth in 2001 by 15 economists polled by The Economist
this week was 3.0%.
For reference, we now know that the US economy
experienced negative economic growth between July and September of 2000, and
officially entered a recession in early 2001.
My point is a relatively
simple one: I don’t think that we have nearly enough evidence yet to conclude
that the Fed has acheived a soft landing for the US economy. Any guesses about
how rough the landing will be will thus have to be based on guesses,
predictions, and assumptions about how consumers and businesses will behave over
the next several months. So I would be hesitant to congratulate the Fed on its
successful soft landing until we know (maybe by mid-2007) if the relatively
optimistic suppositions about future consumer and business behavior were
It’s also worth noting that even as late as November 2000, the
signals from the Fed and the interpretation of Fed-watchers were that the
chances were that the next interest rate move by the Fed would be an increase.
Now we know, of course, that they were compelled to decrease interest rates just a few
weeks later. So despite the Fed’s rhetoric to the contrary, I would still be
cautious in believing that the Fed’s next move in the current episode will end
up being another increase.