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On Friday, February 11, Alan Blinder joined Markus’ Academy for a lecture on Landings Hard and Soft: The Fed, 1965-2020. Blinder is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University, and a regular columnist for The Wall Street Journal.

Watch the full presentation below. You can watch all Markus’ academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

  • [0:00] Soft landings encompass many factors. How to orchestrate a soft landing? And, in which variable should be the soft landing: in GDP/unemployment, inflation, financial condition, or asset prices? Is it ok to disrupt financial markets or will it spill over to the real sector? Historically, interest rate policy followed the Taylor rule, with the Taylor Principle which suggests that the central bank should raise the interest rate more than 1:1 with inflation. In a world with unconventional monetary policy measures, we might also “unconventional landing.” What’s the optimal sequencing? Should central banks first undo asset purchases and then raise interest rates or the other way around? What change in the yield curve would one like to achieve. Should one remove the “Fed put”? How do different forms of monetary tightening affect international emerging markets?
  • [16:39] Understanding the history requires looking at different metrics to evaluate whether the landing was successful. For each tightening, it is important to see that they differ in time, in size of the interest rate hikes, and real GDP drops. 
  • [21:22] Many of the landings were successful, though very different events went on behind the scenes. In the ‘67-’69 period, as the Fed was fighting Vietnam inflation, the Economic Report of the President claimed that the Fed and administration should rely on fiscal policy to focus on the growth of demand. Massive fiscal stimulus played a big role in the ‘72-’74 period, with political motives seeming to be a part of the cause. Some later recessions caused by tightenings even turned out to be small enough that they did not appear in annual data.
  • [42:30] The perfect soft landing was from the end of 1993 to April 1995. Inflation remained relatively constant at 3% throughout this time. Growth slowed only from 4.4% to 1.3%, and unemployment was still at 5.6% in 1995, which was believed to be the natural rate of unemployment at that time. The FOMC had raised the federal funds rate from 3%  to 6%, back to 5.5%. Despite enormous bond market movements a soft landing occurred as real GDP did not drop.
  • [51:59] Orchestrating a soft landing has challenges, but it is not impossible. Of the 11 episodes discussed, seven of them were arguably “pretty soft,” and three of them never had the intention of making the landing soft. Depending on how we view a “soft landing,” the Fed has done this several times, and it seems that they will be able to orchestrate a somewhat-soft landing in the future.