25th June 2019

Is the Fed aiming for a new soft landing?

After three years spent tightening its monetary policy (from December 2015 to December 2018), the United States Federal Reserve put the process on hold at the start of 2019, due to the deterioration of the global environment, caused by trade tensions and the economic slowdown in China and the eurozone.

Whereas, at the beginning of the year, some analysts believed that the Fed would continue raising interest rates, worsened global economic conditions and weak inflation have created doubt about the need for a monetary policy that would be more restrictive.

The Fed currently seems to be meeting the market’s expectations, which are increasingly tending towards one or more interest rate cuts.

The situation seems somewhat similar to circumstances in 1995, when the Fed gave a fresh boost to the US economy by lowering its rates by 0,75% between July 1995 and the start of 1996, in order to prolong the economic expansion phase that began in 1991 and then continued until 2001. That said, there are more similarities with 1995, such as perfectly acceptable economic growth, no upwards inflationary pressures and an outstanding market performance, pre-interest rate cuts.

So what does the soft landing concept mean? It refers to a controlled economic slowdown designed to avoid a recession.
Aykut Efe - Economist, BCEE Asset Management

The Fed President at the time, Alan Greenspan, congratulated himself on the soft landing of the US economy, which continued to expand for a further six years without inflation getting out of hand.

As many economists are now suggesting that the current expansionary cycle will soon end, it would not be surprising if the Fed attempted a repeat of 1995. The only hitch is that the Fed’s soft landing track record is not the best. With the exception of the successful soft landing of 1995, the Fed has often been criticised for always raising its rates too high during expansionary phases to offset inflationary pressures, and ultimately inexorably driving the US economy into recession.

At the moment, even though rates are at record low levels, the Fed seems to be admitting that it has gone too far in its interest rate hikes, as it is trying to reverse its policy, or to at least put it on hold.