Economic Cycle5 分钟阅读

Soft Landing vs. Hard Landing

A plane can touch down gently on the runway, or it can slam into it. When the central bank raises rates, the economy stands at the same fork in the road.

What Are a Soft Landing and a Hard Landing

When prices rise too fast (inflation), the central bank raises rates to cool the economy. At that point two outcomes are possible.

A soft landing is when raising rates calms inflation while stopping short of a recession, ending up merely as "a slowdown in growth." It is the image of a plane landing smoothly.

A hard landing is when the tightening is too much or too late and ends up leading to a recession. Prices are tamed, but unemployment rises and growth breaks down — a landing with a big shock.

The Textbook Soft Landing: The U.S. in 1994–95

The most frequently cited example of a successful soft landing is the U.S. Fed in 1994–95.

In early 1994 the federal funds rate was around 3% and inflation (CPI) was about 2.8%. As the economy picked up and the unemployment rate fell quickly, the Fed preemptively doubled rates from 3% to 6% in about a year, before inflation could overheat.

In the end, it cooled the overheating economy while avoiding a recession. Because it led into the long boom of the late 1990s, it is regarded as a "rare success."

That said, even the soft landing had side effects. The rapid 1994 rate hikes inflicted large losses on the bond market and led to the bankruptcy of Orange County, California. "Avoiding a recession" does not mean "there was no cost."

Representative Cases of a Hard Landing

On the other side are hard-landing cases.

The U.S. in 1979–82: to tame double-digit inflation, then-Fed chairman Paul Volcker drove rates to extreme highs. Inflation was eventually tamed, but at the cost of a deep recession in which the unemployment rate soared into the double digits.

As this shows, a hard landing takes the form of "achieving the goal (price stability) but paying the large shock of a recession."

Soft landings have been uncommon historically, but it is also hard to declare them "extremely rare." Different scholars count the number of successful cases differently, and the criteria for what counts as a "soft landing" also vary somewhat.

What Investors Should Remember

Whether it will be a soft or hard landing is very hard to predict precisely in advance. Even within the same tightening phase, the market swings widely between "soft-landing hopes" and "hard-landing fears."

What matters is that either way, market volatility rises. So rather than "calling which landing it will be," it is more realistic for a long-term investor to decide in advance on a level of diversification and loss tolerance that can endure whichever scenario arrives. With this site's crisis cases, you can directly check the drawdown and recovery period of past tightening and recession phases.

常见问题

Q. Do stocks rise in a soft landing and fall in a hard landing?

It does not split so simply. Because the market reacts to "expectations" before the actual outcome, it rises in advance when soft-landing hopes grow and falls in advance when hard-landing fears grow. By the time the outcome is settled, much of it is often already reflected in prices. Rather than declaring the future direction, you need a stance of preparing for volatility itself.

Q. Isn't not raising rates a soft landing?

A soft landing does not mean "a state of not raising rates" but "a state of taming inflation by raising rates while still avoiding a recession." That is, it is likened to stepping on the brake of tightening but slowing down without a crash. If you do not step on the brake at all, inflation can overheat.