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Jan 10, 2019

How the Fed Can Engineer a Soft Landing in the Economy

By Tim Duy



Despite President Donald Trump criticisms that the Federal Reserve has raised interest rates too far, too fast, thereby penalizing the economy, the flatness of the bond market’s yield curve suggests policy rates are just about at a level that neither stimulates nor restrains growth. But in order for the Fed to engineer a soft landing from last year’s heady growth rate, policy makers must act nimbly as they did in the 1990s to sustain the expansion. Erring in keeping policy rates on the low side will likely encourage financial imbalances, while erring on the high side risks a recession.
There’s no question the economy is slowing, but what constitutes a soft landing? That would be a transition to a slower pace of growth that remains sufficient to hold unemployment relatively constant while inflationary pressures remain at bay. A soft landing for the economy, however, does not necessarily mean a soft landing for investors, as seen in the performance of markets last quarter when concerns of a slowdown grew.

Source: Bloomberg

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