The time to become skeptical of something is when, after a long period of fruitlessly waiting for the opposite to happen, everyone finally gives up and agrees it must be true. That's the current state of things regarding the sudden consensus predicting a "soft landing" for the economy. Jeanna Smialek has more in the New York Times:
The term “soft landing” first made its way into the economic lexicon in the early 1970s, when America was fresh from a successful moon landing in 1969. Setting a spaceship gently on the lunar surface had been difficult, and yet it had touched down.
I did not know that!
In 1994 and 1995, the Fed managed to slow the economy gently without plunging it into a downturn in what is perhaps its most famous successful soft landing.
This is the only soft landing in recent American history.
In late 1989, an economic commentary newsletter from the Federal Reserve Bank of Cleveland asked the question that was on everyone’s mind after a series of Federal Reserve rate increases: “How Soft a Landing?” Analysts were pretty sure growth was going to cool gently and without a painful downturn — the question was how gently.
In late 2000, a column in The New York Times was titled “Making a Soft Landing Even Softer.” And in late 2007, forecasters at the Federal Reserve Bank of Dallas concluded that the United States should manage to make it through the subprime mortgage crisis without a downturn.
Within weeks or months of all three declarations, the economy had plunged into recession. Unemployment shot up. Businesses closed. Growth contracted.
Plus 1973 and 1980, of course, which were also hard landings. Why?
The episodes all illustrate a central point. It is hard to predict what might happen with the economy when rates have risen substantially.
Interest rates are like a slow-release medicine given to a patient who may or may not have an allergy. They take time to have their full effect, and they can have some really nasty and unpredictable side effects if they end up prompting a wave of bankruptcies or defaults that sets off a financial crisis.
Stay skeptical! Everything takes longer than you think, but conventional wisdom is impatient. It's been waiting on a recession for the past year and now it's exhausted. So fuck it. Soft landing it is.
Maybe so. I don't have a crystal ball, and it's true that the economy looks to be in decent shape—though it's been slowing since January. That said, a year is not such a long time. I continue to think it's likely that Fed tightening will start to bite later in 2023. We'll see.
Shorter Kevin: I'm right and everyone else is wrong.
I’ve been hard on Kevin about being overly confident about inflation, unemployment, and the Fed, but here he reflects an appropriate amount of uncertainty:
“Maybe so. I don't have a crystal ball, and it's true that the economy looks to be in decent shape”
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Conventional wisdom gives the Fed far too much credit. The Fed isn't the only actor that influences whether there's a recession or not.
For example, I don't think the Fed had much if anything to do with the 1994-95 "soft landing."
The Fed is certainly capable of engineering harder economic conditions by raising rates through the roof, but I'm growing ever more skeptical of the impact (both in magnitude and lag time) of rate changes in basically every other aspect. When all you have is a hammer...
And in the case of rates vs. inflation, there's a little bit of tail wagging the dog going on here. It sure looks like, in all the data, that when the Fed increases interest rates it has a relatively immediate effect from expectation-setting. And if the Conventional Wisdomers think the Fed's expectation-setting is reasonable and in line with expectations, then that's that to some degree. If the Fed were to try to set expectations that were out of line with reality or not what Conventional Wisdomers think is reality, then it wouldn't have as much of an effect. Note that I'm being very, very broad with my rhetorical brush here, but I think there's truth in this.
As long as any recession occurs after November 2024. A significant downturn prior to that dramatically increases the chances of that convicted felon or some other MAGA fuckhead getting elected.
The phrase “soft landing” may have been popularized by the space program, but it starts rising in about 1957, not “the early 1970s.” And it peaked in 1968, a year before the first manned moon landing.
https://books.google.com/ngrams/graph?content=Soft+landing&year_start=1950&year_end=2000&corpus=en-2019&smoothing=0
Some of the Fed idiocy has already bitten my dear bot.
What 1994 and 2023 have in common is a Democrat for president. In 2023, in particular, we have both the CHIPS act and the IRA act which are stimulating the economy. And we don't have trickle-down tax cuts. Meanwhile, housing construction didn't fall off a cliff. Taken together, I think that helps make a case for a mild recession.
Don't forget the war in Ukraine. That aid consists of armaments made in the US.
...and yes, Kevin should refer to his earlier post
Waitaminute - didn't the Fed just raise rates again?
I can see how the debt ceiling agreement leading to slower Federal spending can lower its contribution to GDP, but other than that, what signs point to nominally lower GDP?
You haven't even bothered to show how strong the correlation is between Fed rates and GDP growth. (I still think the Fed balance sheet, at one point equivalent to nearly 1/3rd of our federal debt, has had the greatest influence over the economy.)
Furthermore, picking out wrong predictions to prove a point is the bad marriage of confirmation and selection biases.
"if they end up prompting a wave of bankruptcies or defaults that sets off a financial crisis"
What would more likely prompt a wave of bankruptcies and defaults is fiscal austerity. Private debts are ultimately paid with public debt (liabilities of the Federal Reserve and the Treasury respectively). Austerity reducing the amount of public debt makes paying private debts harder, and makes financial crises more likely. Rising interest rates do make paying debts harder, but the intended and hopefully major effect is to discourage debts from being taken on.
Conventional wisdom is you constantly harping on sticking with inflation-adjusted data to correctly interpret reality.
Conventional wisdom is you telling everyone that it'll take a year for the effect of Fed rates to trickle down.
You've been echoing quite a bit of conventional wisdom lately. It's only when the conventional wisdom turned on you that you've decided that one should be skeptical -- isn't that so?
Those are definitely not conventional wisdom.
Whether or not to inflation adjust graphs on a blog doesnt really have a conventional wisdom....this doesnt make any sense.
There was definitely no widespread agreement as to the timing and impact if rate increases. Kevin supplied some research to back up his opinion, but it was clearly not a conventional look at expected outcomes which was widely shared.
Try harder.
His own words. He said one should always adjust for inflation.
The Fed seems pretty determined to keep squeezing until they get their recession.