Goodbye inflation, hello deflation (already?)
Welcome back to Inside Economics. Every week, I answer reader questions about the economic forces shaping our world, as well as taking a deeper dive into some of the left-field economic news you may have missed.
This is usually a subscriber-only newsletter, available only to those with a Herald Premium account — but because you're with us here on LinkedIn, we'll give you a bit more of a look under the hood.
This is a Premium newsletter. To unlock the rest of it, as well as all our Herald Premium content, subscribe here. and if you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz... or leave a message in the comments section.
What is the difference between a hard and soft landing?
Q: I keep reading about the prospects of the US achieving a soft landing for the economy. What do the terms soft and hard landing actually mean? - (T. Wood)
A: I’m glad you mentioned the US because it is still a live debate there. New Zealand has had a hard landing because, in simple terms, when economists talk about hard and soft landings they are referring to recession.
Specifically, it refers to whether policymakers can bring down inflation by lifting interest rates without putting the economy into recession.
No recession = soft landing. Recession = hard landing.
In his much-anticipated speech to last weekend’s gathering of central bankers at Jackson Hole, US Federal Reserve chairman Jerome Powell almost declared victory in the war on inflation.
“The time has come for policy to adjust,” Powell said during the Kansas City Fed’s annual conference in Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
It doesn’t get any clearer than that from a central banker outside a rate decision. The US is set to start cutting rates and the first will come at the next Fed meeting on September 18.
Markets were happy and immediately rallied. But news that the inflation fight is won (for this cycle at least) saw the focus at Jackson Hole shift immediately to whether or not the US can pull off a soft landing.
To date, the US economy has proved highly resilient to rising rates and a soft landing is on the cards.
Recommended by LinkedIn
It would be a very rare victory if recession is avoided at this point in the cycle. It has only been achieved once, twice or possibly three times in the US.
This should tell you how widely debated everything about this concept always is. For the record, the candidates for soft landing are the cycles of 1965-67, 1984-87 and 1994.
Reporting from Jackson Hole, the Financial Times notes a good deal of optimism about the prospects this time.
“Andrew Bailey, governor of the Bank of England, and his counterpart at the Fed, Jay Powell, hit back at fears that growth would need to be sacrificed to reach their inflation goals. As they began to cut borrowing costs, both men signalled they were still on course to avoid a recession. Economists in the audience echoed their optimism.”
Here’s hoping. When it comes to US cycles, Wall Street has a lot of power. It is typically big market crashes that undo efforts for soft landings. That looked like it was happening a few weeks ago when the Fed failed to deliver an August rate cut and Wall Street threw a temper tantrum.
But investors seem to have been calmed for now. Call me superstitious but I’m always a little nervous as we head into the US autumn (or fall, as they call it).
The Wall Street Crash of 1929 and Black Monday in 1987 were both in October. The 2008 Global Financial Crisis (GFC) peaked in September and through October.
What you're missing
This is a subscriber-only newsletter, usually available only to those with a Herald Premium account. Thanks to our partners at LinkedIn News Australia you've been given more of a taste of it.
Here's what's covered in the full edition: