Soft Landing

Have you been flying anywhere lately? Although most people are not afraid of plane travels anymore, they are a bit tense during landing. It's not surprising: we all fear a crash or hard landing. Fortunately, the vast majority of air travels end with a soft landing, which means that the airplane reaches the ground without difficulty or damage.

But let’s leave aeronautics, what about the economy? In economics, soft landing means a period when economic growth slows down, but the economy does not enter recessions. In other words, soft landing is a cyclical downturn, that avoids triggering an economic crisis. It may also refer to a particular sector or market – such as the stock market – that slows down but doesn’t crash.

Soft landing is a Holy Grail for the officials who try their best through monetary policy and fiscal policy to prevent a hard landing. In particular, the Fed and other central banks try to raise interest rates high enough to prevent the economy from overheating and high inflation, but not high enough to cause a sharp decline in output.

However, the Fed’s track record is rather poor. Please look at the chart below. As one can see, the only true soft landing in the history of the Fed’s tightening cycles and the US business cycle occurred in 1994-1995, when Alan Greenspan managed to raise the federal funds rate and didn’t bring about a financial crisis and recession.

_{Chart 1: Federal funds rate (green line, right axis, in %) and the US real GDP growth (red line, left axis, annual percentage change) from Q1 1955 to Q4 2019.}

Gold and Soft Landing

What is the link between gold and soft landing? Well, it’s not a mystery that gold prefers it when the economic downturn ends with recession. The harder the landing, the better for gold prices. In the 1990s, gold was in the bear market, while after the Great Recession, gold reached its peak.

However, soft landings are rare. And they often result in later crises – Greenspan perhaps avoided the hard landing in the mid-1990s, but his policy contributed to the following dot-com bubble.

And, funny thing, the pundits often expect the soft landing, while the reality brings recession. Our favorite example is the IMF’s report dated back on August 6, 2007, entitled “Soft Landing Ahead for U.S. Economy”. Well, that’s not exactly how economic life went on. Gold, which is a safe-haven assets, should benefit from such surprises.