Can We Repeat The 1994 Soft Landing?

Inflation is threatening. As a result, interest rates are quickly moving higher after being anchored at low levels for an extended period. While forecasters are calling for a soft landing, there is concern that the Federal Reserve will overcorrect and cause a recession.

Want to escape the economic news? Head over to the theater, where you can enjoy the box office smash “The Lion King.”

That’s right, the year is 1994. Interest in that date has intensified recently, and not because Simba, Pumbaa, and Timon are making a comeback. In 1994, the Federal Reserve began a tightening program that saw interest rates rise by 3% in a little over 12 months. While the movement was aggressive, it did result in one of the few truly soft landings in American economic history.

With interest rates likely to rise at a comparable pace and by a comparable amount this year, analysts are studying the 1994 experience to anticipate what might lie ahead in the present day. What they will find is that while the Fed got a lot of credit for its careful steering back then, the outcome may have had more to do with luck than skill. That luck looks unlikely to recur, and the landing this time this may not be so soft.

WEC Chart - Soft Landing - 1990 - 2020

As 1993 closed, Alan Greenspan and his colleagues at the Fed were concerned. The U.S. economy had recovered powerfully after a brief recession in 1991. Unemployment was falling rapidly, and the utilization of capacity in the nation’s factories was rising rapidly. Both were approaching levels that were thought to trigger higher inflation.

Back then, monetary policy worked with much longer lags than it does today; the role of the financial markets as a transmission mechanism was more limited. The Fed therefore felt that inflation had to be addressed proactively; if you waited until it actually appeared, they thought, it was too late to do much about it. That informed the decision to move interest rates up aggressively, to get out in front of the problem.