London Daily

Focus on the big picture.
Wednesday, Sep 09, 2026

The Fed has a new plan to avoid recession: Party like it's 1994

The Fed has a new plan to avoid recession: Party like it's 1994

Wide leg jeans, butterfly clips and half-point rate increases: The 1990s are back.

Earlier this month Federal Reserve chair Jerome Powell announced a half-percentage-point increase in interest rates, the largest hike in over two decades. Powell also indicated that he wouldn't hesitate to do it again — a move straight out of the central bank's 1994 playbook, when the Fed last tempered the US economy and successfully executed a so-called soft landing.

In the 12 months that followed February 1994, the Fed, under former Chair Alan Greenspan, nearly doubled interest rates to 6% in just seven hikes, including two half-point increases and one three-quarter-point hike.

"Eat your heart out, 1994," wrote Morgan Stanley analysts in a note following Powell's comments.

Inflation rates are near 40-year highs and most economists agree that the Fed should raise interest rates in order to reduce economic demand and maintain price stability. They just don't agree on what that will mean for the economy at large.

The history of central bank rate hikes does appear to support the inevitability of an economic downturn, but there have been rare instances when the Fed has made a soft landing: Once in 1965, and again in 1984 and 1994.

Over the next few months, the Fed will attempt to engineer a cooling of the economy that leads to lower prices but doesn't spiral into recession. It's a Goldilocksian task that some, including former New York Federal Reserve Bank president Bill Dudley, believe will be nearly impossible to execute.

Larry Summers, a noted critic of Powell's Fed, has clocked the probability of the central bank's actions leading to a hard landing at 100%. Analysts at Goldman Sachs say it's closer to a one-in-three chance.

But Powell remains convinced that 1994 has more to offer us than replays of The Lion King and Ace of Base.

"I believe that the historical record provides some grounds for optimism: Soft, or at least soft-ish, landings have been relatively common," Powell said in a March speech.

But there are some major differences between 1994 and 2022, and timing may be the most important factor.

Greenspan proactively raised rates. He saw that the economy was booming and wanted to get ahead of the inevitable inflation. Powell has been more reactive. He hiked rates by half a percentage point only after inflation soared to levels unseen in decades. There's a possibility that the Fed may be too far behind the curve to be able to ease inflation without inflicting economic hardship on Americans.

Employment today isn't what it was then, either. In 1994, baby boomers were at the heights of their careers, loads of new technology was being introduced in the workplace, and immigration numbers were strong. All of that led to a huge workforce and productivity rates that kept unemployment low even as interest rates rose. In 2022, we're faced with boomers who are ready to exit the workforce, a significant pandemic-reduced labor participation rate and a productivity slowdown.

"In the past, when you've pushed up the unemployment rate, you've almost never been able to avoid a full-fledged recession," Dudley said. "The problem the Fed faces is they're just late."

Rocked by world events


Geopolitical luck was also a factor in the '94 soft landing, and despite economists' best efforts, luck can't be easily replicated.

The North American Free Trade Agreement (NAFTA) was adopted in 1994 and the Berlin Wall had fallen just five years prior. Both events increased the availability of imports and lowered the cost of goods. Today globalization is in retreat as the pandemic and war in Ukraine have led to significant energy price shocks and supply chain disruptions.

"On closer inspection, the Greenspan Fed was the beneficiary of considerable good fortune, which the current Fed is unlikely to enjoy," Carl Tannenbaum, chief economist for Northern Trust, wrote in a research note. "None of this is to suggest that a soft landing is impossible this time around. But the degree of difficulty is much higher than it was 28 years ago."

There may still be room for a soft landing, so long as you're willing to tweak the definition a bit. We've seen 11 instances of the Fed tightening policy since 1965 (not including the current moves), said Princeton economist Alan Binder. Seven of them resulted in economic production falling less than 1%, a relatively small downturn. "So soft landings can't be all that hard to achieve," he concluded.

After all, a soft-ish landing may be the best we can hope for.

Comments

Oh ya 4 year ago
The crash be coming. Cant print trillions and not expect Zimbabwe

Newsletter

Related Articles

0:00
0:00
Close
British Chambers of Commerce Forecasts UK Growth of 1% as Investment Remains Weak
UK Suspends Local Government Reorganisation Decisions and Cancels Planned Shadow Authority Polls
UK Parliament Opens Inquiry Into Gaps in Climate Change Preparedness
Andy Burnham and Xi Jinping Hold Talks on Trade, Security and British Consular Cases
UK Joins France, Canada and Other Nations in Measures Against Israeli West Bank Settlements
UK Announces New Sanctions Targeting Iranian Nuclear and Military Networks
British Chambers of Commerce Calls for Business Rate Reform and Productivity Support
UK Farmers Warn Dry Summer Could Reduce Crop Yields and Push Up Food Prices
UK Rail Networks Hit by Widespread Delays After Major Signalling Failures
Matt Clifford Resigns as ARIA Chair After Conflict-of-Interest Scrutiny
UK and France Say Joint Border Operations Have Prevented More Than 48,000 Irregular Channel Crossings
UK Core Inflation Remains Above Expectations as Utility and Commodity Costs Stay Elevated
Jaguar Land Rover Considers Up to 4,000 UK Job Cuts Amid Automotive Industry Pressure
UK Government Pauses Local Authority Reorganisation for Legal Review
UK Public Borrowing Reaches £1.8 Billion in July, Adding Pressure Before Autumn Budget
Chancellor John Healey Puts Regional Devolution and Fiscal Discipline at Heart of UK Growth Plan
Counter-Terrorism Police Lead Salford Investigation After Two Teenagers Charged
UK Rejects Financial Reparations for Transatlantic Slavery
UK and Egypt Step Up Diplomacy Over Escalating West Bank Tensions
UK Pauses Council Reorganisation Across Four English Counties
Jaguar Land Rover Plans 4,000 Job Cuts in Major UK Restructuring
UK Unveils Planning and Regulatory Overhaul to Speed Infrastructure and Economic Growth
University of Bristol Opens £500 Million Innovation Campus
Families Give Evidence to Independent Review of Sussex Maternity Failures
Sweden Confirms Deportation of 458 British Citizens Over Post-Brexit Residency Rules
UK Launches £3 Million Challenge for Long-Duration Energy Storage
Reform UK Proposes £100 Billion in Spending Cuts and Brownfield Deregulation
Andy Burnham Warns Macron That EU Procurement Rules Could Hurt British Steel
Andy Burnham Faces Major Decision on Future North Sea Oil and Gas Drilling
SEND Support in England Projected to Reach One in 10 Pupils
England’s Housing Courts Struggle With Surge in No-Fault Eviction Cases
Violent Clashes Erupt in Portsmouth During Protest Against Asylum Processing
Three-Quarters of NHS Emergency Staff Report Regular Violence or Aggression
UK Considers Converting Female Prison Space for Male Inmates as Overcrowding Worsens
UK House Prices Record First Annual Decline in Nearly Three Years
UK Government Reassesses Policy Toward Israel Amid Calls for Diplomatic Shift
Reform UK Faces Police Scrutiny Over Alleged Foreign Donations Scheme
University of Bristol Opens £500 Million Temple Quarter Enterprise Campus
Online Bookmakers Accused of Privacy Breaches Through Cookie Consent Practices
Health Campaigners Urge UK Government to Abandon U.S. Pharmaceutical Agreement
Three-Quarters of UK A&E Staff Report Regular Violence or Aggression
Far-Right Demonstrations Target Portsmouth as Small-Boat Crossings Fuel Tensions
UK Records Hottest Summer on Record After Severe Heatwaves
UK Travellers Face Renewed EU Border Delays as Temporary Flexibility Ends
UK Rejects Calls to Pause AI Data Centre Expansion Despite Energy Concerns
UK Defence Figures Push for 3% Spending Target Amid Falklands Concerns
England Faces Rising Financial Pressure as Special Educational Needs Plans Surge
Metropolitan Police Consider Reform UK Probe Over Overseas Donations
Keir Starmer to Leave Parliament, Triggering By-Election
UK Treasury Weighs Windfall Taxes on Banks and Oil Companies Amid Bond Market Turmoil
×