Has the Federal Reserve Achieved a Soft Landing in 2023?
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December 11, 2023
Has the Federal Reserve Achieved a Soft Landing in 2023?
Since the Federal Reserve (Fed) began raising rates in
Powell has pointed to soft landings after monetary
response to high inflation in March 2022, it has been trying
tightening in 1965, 1984, and 1994. Those episodes were
to achieve a “soft landing”—a return to low inflation while
arguably less challenging than the current one, however.
maintaining moderate economic growth. By contrast, a
They featured smaller cumulative rate increases than this
majority of private sector economists had, until recently,
most recent period of tightening because inflation was
predicted that the Fed’s actions would result in a “hard
already low in 1965 and 1994 and below 5% in 1984. A
landing”—a recession—in 2023.
recent study of historical soft and hard landings found, “If
the need to fight inflation is not too extreme, and serious
Achieving a soft landing after sustained monetary policy
adverse events like wars or supply shocks do not intervene,
tightening is notoriously difficult. Historically, most periods
the Federal Reserve has shown itself capable of engineering
of sustained tightening have been followed by recessions.
a landing that either does not induce a recession or, if it
Nonetheless, the recent period of monetary policy
does, induces a small one. It has done so several times.”
tightening has so far resulted in falling inflation without a
decline in employment or economic activity. If inflation
Figure 1. Federal Funds Rate and Inflation
reaches the Fed’s target of 2% without a recession, a soft
January 1960 to September 2023
landing will have been achieved. This In Focus looks at
whether a hard landing has been avoided or merely
postponed. (For information on how recessions are declared
and defined, see CRS In Focus IF10411, Introduction to
U.S. Economy: The Business Cycle and Growth.)
Recent Monetary Tightening
Throughout much of 2021 and 2022, inflation persistently
rose to levels not seen in the United States since the 1980s.
(See CRS Report R46890, Inflation in the Wake of COVID-
19.) To reduce high inflation, the Fed raised short-term
interest rates from a range of 0%-0.25% to a range of
5.25%-5.50% between March 2022 and July 2023 (see
Figure 1). The Fed has not ruled out further rate increases
depending on the future path of prices and other economic
Source: Federal Reserve, Bureau of Economic Analysis.
data. The Fed is statutorily mandated to maintain low and
stable prices—which it defines as 2% inflation, as measured
Why Is a Soft Landing Possible?
by the personal consumer expenditures price index (PCE)—
By many measures, the economy looks like it is headed for
and maximum employment. Monetary policy tightening
a soft landing. Despite a recent pause in rate increases,
(higher interest rates) works to reduce aggregate demand
inflation has continued to fall. PCE was unchanged in
(total spending) in the economy, which can reduce
October 2023 for the month, and the 3.0% year-over-year
inflationary pressures but can also result in rising
increase was the lowest rate since March 2021. There are
unemployment, often leading to recession. In theory, it
signs that the labor market is not as tight as it was last year:
would be difficult for monetary tightening to generate a
For example, the unemployment rate rose from 3.4% in
large reduction in inflation without a significant economic
April 2023 to 3.9% in October 2023 (before falling to 3.7%
slowdown. For more information, see CRS In Focus
in November), and job growth over the last 12 months has
IF11751, Introduction to U.S. Economy: Monetary Policy.
fallen to a more sustainable rate—a little more than half the
previous 12 months (see Figure 2).
History of Hard and Soft Landings
Historically, periods of similarly rapid and substantial
How was the Fed able to raise rates rapidly and by a large
interest rate increases have resulted in recession (see Figure
magnitude without triggering a hard landing? Why were the
1). Some of the more obvious parallel periods, in terms of
predictions of a majority of economists incorrect? One
starting inflation rate and magnitude of rate hikes, are
explanation is that the labor market has tightened some as
recessions during the so-called Great Inflation of the late
predicted following monetary tightening—but because
1960s to the early 1980s. (Not all recessions have been
unemployment started at such low levels, the rise has so far
direct results of monetary tightening. For example, the 2020
not resulted in the high levels that one would associate with
recession was a direct result of the COVID-19 pandemic
a recession. (The lowest peak unemployment rate in a U.S.
and its effects on economic activity.) Not every monetary
recession since World War II is 6.1%.) Historically, periods
tightening has resulted in a recession. Fed Chair Jerome
of low unemployment (below 4%, for example) were
associated with rising inflation. Based on this phenomenon,
https://crsreports.congress.gov
Has the Federal Reserve Achieved a Soft Landing in 2023?
economists theorized there was a non-accelerating inflation
A historical pattern that might suggest a hard landing will
rate of unemployment (NAIRU) and that inflation would
be avoided is that a recession so soon after the last one
rise when unemployment dipped below the NAIRU. But in
would be unusual: In the past 50 years, it has happened only
the low inflation era, low unemployment in 1999-2000,
once (in 1981, also when inflation was high). The past four
2006-2007, and 2018-2019 did not trigger sustained
expansions have lasted between six and 10 years. This
increases in inflation. In response, policymakers came to
could be because a recession is less likely before an
view the inflation-unemployment relationship as weak,
expansion has gathered full steam or because the
resulting in a shift in monetary policy strategy to no longer
probability of a negative shock that derails the expansion at
raising interest rates solely because of low unemployment.
any given time is low. The unique circumstances around the
post-COVID-19 recovery might make it less likely that the
Figure 2.Monthly Job Growth
economy will follow the historical pattern, however.
January 2021 to October 2023
Is a Hard Landing Still Possible?
Recession looks to have been avoided in 2023, and many
indicators have shown promising signs in recent months.
Nevertheless, it is still possible that the economy could end
up in a recession in 2024 through a few different scenarios.
If inflation remains above target, the Fed may begin raising
rates again, which could result in a recession if
implemented too quickly or aggressively. Although
inflation has been coming down, core inflation (which
removes food and energy prices) is still 3.5%, and there are
particular categories, such as shelter, that have remained
high. If the relationship between tight labor markets and
rising inflation has resurfaced since the pandemic, inflation
Source: BLS, Current Employment Statistics.
is unlikely to fall without a further increase in the
One reason the relationship might continue to be weak is
unemployment rate, which would be consistent with a
because the initial rise in inflation was closely linked to
recession. Also, conflict in the Middle East has some
disruptions that temporarily constrained supply. Supply
economists concerned about its potential effects on oil
chain issues and a drop in the size of the labor force
prices, which could cause increases in inflation and lower
resulting from the pandemic were initially significant
growth in the future depending how the situation
contributors to inflation. Then in 2022, the Russian invasion
progresses.
of Ukraine caused commodity prices, such as gasoline
prices, to rise rapidly (as measured by the percent change
Some economic metrics suggest that a soft landing has not
from a year previously). Now supply chain issues have
been achieved, leaving open the possibility of a hard
largely been resolved, the labor force participation rate has
landing later on. This is because a strong economy could
increased notably in the past year, and commodity prices
keep inflation elevated, making it more likely the Fed will
have generally fallen. Some economists believe that easing
continue to raise rates. Gross domestic product grew by an
supply constraints have made it easier for the Fed to lower
unexpectedly high 5.2% in the third quarter of 2023
inflation without any rise in unemployment needed, a
(boosted, in part, by robust consumer spending), and the
scenario consistent with a soft landing.
unemployment rate is still quite low by historical standards.
Another explanation for why a hard landing has been
Another possibility is that the Fed’s actions to this point
avoided is that consumers had savings to fall back on even
have already made a recession likely, but it just has not
as higher interest rates and prices eroded borrowing
started yet. Monetary policy changes affect the economy
capabilities and purchasing power. Consumers accumulated
with a long and variable lag, so growth may yet slow. One
excess savings during the pandemic, when travel and
of the reasons the Fed has paused rate hikes for the time
certain types of commerce constrained consumption and
being is to see how previous increases are affecting the
government transfers in pandemic relief legislation led to a
economy.
temporary spike in income. According to the Fed, excess
savings peaked at $2.3 trillion in the third quarter of 2021.
Lastly, were economic activity to weaken while inflation
The increased stock of savings may have allowed
remained above target, the monetary stimulus needed to
consumers to continue to spend at elevated rates, as
avoid a recession could exacerbate inflationary problems.
evidenced by recent drawdowns in the stock of savings and
This could potentially make the Fed unwilling to provide
robust personal consumption expenditures of recent
that stimulus. For the time being, projections of the
quarters. By its nature, this support to spending is only
economy remain mixed. For example, the Wall Street
temporary, however. One study found that excess pandemic
Journal Survey of Economists from October 2023 showed a
savings has been drawn down (though not yet fully), falling
median probability of recession in the coming year at 50%.
to about 10% of annual disposable income in the second
quarter of 2023 after peaking at around 14% at the end of
Lida R. Weinstock, Analyst in Macroeconomic Policy
2021.
Marc Labonte, Specialist in Macroeconomic Policy
IF12543
https://crsreports.congress.gov
Has the Federal Reserve Achieved a Soft Landing in 2023?
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF12543 · VERSION 1 · NEW
December 11, 2023
Has the Federal Reserve Achieved a Soft Landing in 2023?
Since the Federal Reserve (Fed) began raising rates in
Powell has pointed to soft landings after monetary
response to high inflation in March 2022, it has been trying
tightening in 1965, 1984, and 1994. Those episodes were
to achieve a “soft landing”—a return to low inflation while
arguably less challenging than the current one, however.
maintaining moderate economic growth. By contrast, a
They featured smaller cumulative rate increases than this
majority of private sector economists had, until recently,
most recent period of tightening because inflation was
predicted that the Fed’s actions would result in a “hard
already low in 1965 and 1994 and below 5% in 1984. A
landing”—a recession—in 2023.
recent study of historical soft and hard landings found, “If
the need to fight inflation is not too extreme, and serious
Achieving a soft landing after sustained monetary policy
adverse events like wars or supply shocks do not intervene,
tightening is notoriously difficult. Historically, most periods
the Federal Reserve has shown itself capable of engineering
of sustained tightening have been followed by recessions.
a landing that either does not induce a recession or, if it
Nonetheless, the recent period of monetary policy
does, induces a small one. It has done so several times.”
tightening has so far resulted in falling inflation without a
decline in employment or economic activity. If inflation
Figure 1. Federal Funds Rate and Inflation
reaches the Fed’s target of 2% without a recession, a soft
January 1960 to September 2023
landing will have been achieved. This In Focus looks at
whether a hard landing has been avoided or merely
postponed. (For information on how recessions are declared
and defined, see CRS In Focus IF10411, Introduction to
U.S. Economy: The Business Cycle and Growth.)
Recent Monetary Tightening
Throughout much of 2021 and 2022, inflation persistently
rose to levels not seen in the United States since the 1980s.
(See CRS Report R46890, Inflation in the Wake of COVID-
19.) To reduce high inflation, the Fed raised short-term
interest rates from a range of 0%-0.25% to a range of
5.25%-5.50% between March 2022 and July 2023 (see
Figure 1). The Fed has not ruled out further rate increases
depending on the future path of prices and other economic
Source: Federal Reserve, Bureau of Economic Analysis.
data. The Fed is statutorily mandated to maintain low and
stable prices—which it defines as 2% inflation, as measured
Why Is a Soft Landing Possible?
by the personal consumer expenditures price index (PCE)—
By many measures, the economy looks like it is headed for
and maximum employment. Monetary policy tightening
a soft landing. Despite a recent pause in rate increases,
(higher interest rates) works to reduce aggregate demand
inflation has continued to fall. PCE was unchanged in
(total spending) in the economy, which can reduce
October 2023 for the month, and the 3.0% year-over-year
inflationary pressures but can also result in rising
increase was the lowest rate since March 2021. There are
unemployment, often leading to recession. In theory, it
signs that the labor market is not as tight as it was last year:
would be difficult for monetary tightening to generate a
For example, the unemployment rate rose from 3.4% in
large reduction in inflation without a significant economic
April 2023 to 3.9% in October 2023 (before falling to 3.7%
slowdown. For more information, see CRS In Focus
in November), and job growth over the last 12 months has
IF11751, Introduction to U.S. Economy: Monetary Policy.
fallen to a more sustainable rate—a little more than half the
previous 12 months (see Figure 2).
History of Hard and Soft Landings
Historically, periods of similarly rapid and substantial
How was the Fed able to raise rates rapidly and by a large
interest rate increases have resulted in recession (see Figure
magnitude without triggering a hard landing? Why were the
1). Some of the more obvious parallel periods, in terms of
predictions of a majority of economists incorrect? One
starting inflation rate and magnitude of rate hikes, are
explanation is that the labor market has tightened some as
recessions during the so-called Great Inflation of the late
predicted following monetary tightening—but because
1960s to the early 1980s. (Not all recessions have been
unemployment started at such low levels, the rise has so far
direct results of monetary tightening. For example, the 2020
not resulted in the high levels that one would associate with
recession was a direct result of the COVID-19 pandemic
a recession. (The lowest peak unemployment rate in a U.S.
and its effects on economic activity.) Not every monetary
recession since World War II is 6.1%.) Historically, periods
tightening has resulted in a recession. Fed Chair Jerome
of low unemployment (below 4%, for example) were
associated with rising inflation. Based on this phenomenon,
https://crsreports.congress.gov
Has the Federal Reserve Achieved a Soft Landing in 2023?
economists theorized there was a non-accelerating inflation
A historical pattern that might suggest a hard landing will
rate of unemployment (NAIRU) and that inflation would
be avoided is that a recession so soon after the last one
rise when unemployment dipped below the NAIRU. But in
would be unusual: In the past 50 years, it has happened only
the low inflation era, low unemployment in 1999-2000,
once (in 1981, also when inflation was high). The past four
2006-2007, and 2018-2019 did not trigger sustained
expansions have lasted between six and 10 years. This
increases in inflation. In response, policymakers came to
could be because a recession is less likely before an
view the inflation-unemployment relationship as weak,
expansion has gathered full steam or because the
resulting in a shift in monetary policy strategy to no longer
probability of a negative shock that derails the expansion at
raising interest rates solely because of low unemployment.
any given time is low. The unique circumstances around the
post-COVID-19 recovery might make it less likely that the
Figure 2.Monthly Job Growth
economy will follow the historical pattern, however.
January 2021 to October 2023
Is a Hard Landing Still Possible?
Recession looks to have been avoided in 2023, and many
indicators have shown promising signs in recent months.
Nevertheless, it is still possible that the economy could end
up in a recession in 2024 through a few different scenarios.
If inflation remains above target, the Fed may begin raising
rates again, which could result in a recession if
implemented too quickly or aggressively. Although
inflation has been coming down, core inflation (which
removes food and energy prices) is still 3.5%, and there are
particular categories, such as shelter, that have remained
high. If the relationship between tight labor markets and
rising inflation has resurfaced since the pandemic, inflation
Source: BLS, Current Employment Statistics.
is unlikely to fall without a further increase in the
One reason the relationship might continue to be weak is
unemployment rate, which would be consistent with a
because the initial rise in inflation was closely linked to
recession. Also, conflict in the Middle East has some
disruptions that temporarily constrained supply. Supply
economists concerned about its potential effects on oil
chain issues and a drop in the size of the labor force
prices, which could cause increases in inflation and lower
resulting from the pandemic were initially significant
growth in the future depending how the situation
contributors to inflation. Then in 2022, the Russian invasion
progresses.
of Ukraine caused commodity prices, such as gasoline
prices, to rise rapidly (as measured by the percent change
Some economic metrics suggest that a soft landing has not
from a year previously). Now supply chain issues have
been achieved, leaving open the possibility of a hard
largely been resolved, the labor force participation rate has
landing later on. This is because a strong economy could
increased notably in the past year, and commodity prices
keep inflation elevated, making it more likely the Fed will
have generally fallen. Some economists believe that easing
continue to raise rates. Gross domestic product grew by an
supply constraints have made it easier for the Fed to lower
unexpectedly high 5.2% in the third quarter of 2023
inflation without any rise in unemployment needed, a
(boosted, in part, by robust consumer spending), and the
scenario consistent with a soft landing.
unemployment rate is still quite low by historical standards.
Another explanation for why a hard landing has been
Another possibility is that the Fed’s actions to this point
avoided is that consumers had savings to fall back on even
have already made a recession likely, but it just has not
as higher interest rates and prices eroded borrowing
started yet. Monetary policy changes affect the economy
capabilities and purchasing power. Consumers accumulated
with a long and variable lag, so growth may yet slow. One
excess savings during the pandemic, when travel and
of the reasons the Fed has paused rate hikes for the time
certain types of commerce constrained consumption and
being is to see how previous increases are affecting the
government transfers in pandemic relief legislation led to a
economy.
temporary spike in income. According to the Fed, excess
savings peaked at $2.3 trillion in the third quarter of 2021.
Lastly, were economic activity to weaken while inflation
The increased stock of savings may have allowed
remained above target, the monetary stimulus needed to
consumers to continue to spend at elevated rates, as
avoid a recession could exacerbate inflationary problems.
evidenced by recent drawdowns in the stock of savings and
This could potentially make the Fed unwilling to provide
robust personal consumption expenditures of recent
that stimulus. For the time being, projections of the
quarters. By its nature, this support to spending is only
economy remain mixed. For example, the Wall Street
temporary, however. One study found that excess pandemic
Journal Survey of Economists from October 2023 showed a
savings has been drawn down (though not yet fully), falling
median probability of recession in the coming year at 50%.
to about 10% of annual disposable income in the second
quarter of 2023 after peaking at around 14% at the end of
Lida R. Weinstock, Analyst in Macroeconomic Policy
2021.
Marc Labonte, Specialist in Macroeconomic Policy
IF12543
https://crsreports.congress.gov
Has the Federal Reserve Achieved a Soft Landing in 2023?
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF12543 · VERSION 1 · NEW