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September 20, 2006

A soft landing

The term ‘soft landing’ is being used a lot in discussions about the economy. N.C. State University economist Mike Walden explains what it means and why economists are using it a lot these days.

“It means for the economy and the economic growth rate … to slow down but without it slowing down so much that we crash into a recession,” he says. “So … think of an airplane coming in for a landing. You want that airplane to land smoothly on the runway; you don’t (obviously) want it to crash.

“Of course, the reason the Fed is trying to slow the economy down is that’s the way they think they can constrain inflation. And inflation has been a problem over the last couple of years, at least in the Fed’s eyes,” Dr. Walden adds.

“So as we know the Fed has been increasing interest rates for the past couple of years. The problem, of course, is they never know the total impact that their interest rate hikes may bring about. It may be enough just to slow down the economy. It may be, on the other hand, too much and we have an economic crash.

“What they want to have happen is a soft landing like we had 10 years ago. In 1996, the Fed did the same thing. We had a soft landing and did not have a recession,” he concludes. “On the other hand, they do not want to repeat 2001, when we did crash into a recession.”

Posted by deeshore at September 20, 2006 09:58 AM