Why a soft landing for the US economy could prove elusive

On the eve of recessions in 1990, 2001 and 2007, many Wall Street economists proclaimed the U.S. was on the cusp of achieving a soft landing, in which interest-rate increases corralled inflation without causing a recession.

- Nick Timiraos

Similarly, this summer's combination of easing inflation and a cooling labor market has fueled optimism among economists and Federal Reserve officials that this elusive goal might be in reach.

But soft landings are rare for a reason: They are tricky to pull off. "You need a lot of luck," said Antúlio Bomfim, a former adviser to Fed Chair Jerome Powell who is now at Northern Trust Asset Management.

Fed officials are set to hold rates steady this week after raising them to a 22-year high because they don't want to blow a shot at achieving a soft landing.

The goal faces four threats: the Fed holds rates too high for too long, economic growth accelerates, energy prices rise or a financial crisis erupts.

"The Fed could temporarily achieve a soft landing, but I'm skeptical that it could stick the landing for very long," said Peter Berezin, chief global strategist at BCA Research in Montreal.

Once the economy is operating with little or no slack, anything that boosts demand could stoke inflation. Meanwhile, anything that lowers demand could send the unemployment rate rising, a process that is hard to stop once it starts, said Berezin. He expects a recession in the second half of next year.

The 1969 moon landing propelled the "soft landing" expression into the economic lingo in the early 1970s. Nixon administration officials sought to conquer high inflation without triggering a severe downturn.

Since World War II, econo say, the U.S. has achieved only one durable soft landing, in 1995. "We steered the economy very expertly, but in addition, we were lucky. Nothing bad happened," said Alan Blinder, an economist who was Fed vice chair from 1994-96.

Here is what could go wrong this time.

The Fed stays too tight