Set your TV to a financial news channel and you might catch a pundit warning that Fed rate hikes will surely result in a hard landing. Another pundit might interject and claim that the landing will be soft.
With all the jargon tossed around in finance, getting the terms down can make it easier to follow the conversation.
Before jumping into landings, it's important to understand the U.S. Federal Reserve's official mission. The Federal Reserve is required by Congress to pursue stable prices (meaning, among other things, low inflation) and to promote low unemployment. The key tool the Federal Reserve uses is raising and lowering interest rates.
Low-interest rates encourage lending and typically spur increased economic activity. Businesses can borrow money to invest, for example, and consumers will often take advantage of low interest rates to buy on credit. But low interest rates can result in high inflation, which can hurt both consumers and businesses. If inflation is too high, the Fed may raise interest rates to curb inflation and potentially cool an overheated economy.
In recent months, the Federal Reserve has been raising interest rates in an effort to cool inflation. So far, some data indicate that the Fed's actions are working and that inflation is tapering off. However, some analysts have warned that the Fed's interest rate hikes will hurt the economy and might even set off a recession. If the economy does contract, it would be viewed as a hard landing.
If the Fed can lower interest rates and cool the economy without causing a contraction, it would be considered a soft landing. So far, the Fed has been aiming for a soft landing, hoping to cool the economy and moderate inflation without causing a recession.
