"The Economic Recovery So Far
The recovery from the 2020 recession was rapid through the first half of 2021, but the transition to
moderate, sustainable economic growth has been choppy, with negative growth in the first quarter of
2022. Moreover, high inflation has complicated the path forward. Since March 2022, the annual change in
the Consumer Price Index has been above 8%.
To reduce inflation, the Federal Reserve (Fed) is raising the federal funds rate (a short-term interest rate)
to reduce aggregate demand (total spending). Since March, the Fed has raised rates from a range of 0-
0.25% to a range of 1.5-1.75%. This raises the question of how much demand needs to slow to restore
low inflation. This Insight discusses three scenarios for what might come next—a soft landing, a hard
landing, and stagflation.
Soft Landing?
Fed leadership aspires to restore price stability through a “soft landing,” where growth is moderate but
positive, and unemployment rises modestly, if at all. This is reflected in Fed leadership’s medianprojection that inflation will fall to 2.6% in 2023, while unemployment will remain below 4%. Fed
Governor Christopher Waller envisions a soft landing where firms reduce job openings instead of laying
off workers. Skeptics refer to this scenario as the “immaculate disinflation” because, under standard
theory, a sizeable and rapid reduction in inflationary pressures requires an increase in unemployment.
Soft landings are infrequent. Fed Chair Jerome Powell recently argued that soft landings occurred after
monetary tightening in 1965, 1984, and 1994, as shown in Figure 1, and that some other recessions, such
as in 2020, should not be attributed to tightening. However, inflation was low in 1965 and 1994, and
below 5% in 1984.."
U.S. Economy
