London Daily

Focus on the big picture.
Wednesday, Nov 04, 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.

Newsletter

Related Articles

0:00
0:00
Close
Department for Energy Security and Net Zero Approves Construction of New North Sea Offshore Wind Hub
Northern Ireland Executive Finalizes Public Sector Pay Agreements Following Months of Inter-Agency Negotiations
Welsh First Minister Eluned Morgan Secures Cross-Party Support for Regional Clean Energy Infrastructure Bill
Competition and Markets Authority Launches Formal Investigation Into Dominant Artificial Intelligence Cloud Partnerships
United Kingdom Foreign Secretary David Lammy Concludes High-Level Diplomatic Mission to Washington and Ottawa
Scottish Government Announces Emergency Housing Investment Package to Address Escalating Urban Homelessness
Chancellor Rachel Reeves Finalizes Corporate Tax Adjustments Ahead of Upcoming Business Investment Summit
National Health Service England Unveils Emergency Winter Resilience Plan to Combat Projected A&E Overcrowding
Bank of England Monetary Policy Committee Votes to Hold Base Interest Rate Steady at Four Point Seven5 Per Cent
UK Gross Domestic Product Expands by Zero Point Four Per Cent in Third Quarter Driven by Resilient Services Growth
Northern Ireland Executive Agrees on Multi-Year Public Sector Pay Restructuring Framework at Stormont
Department for Transport Confirms Acceleration of Electric Vehicle Charging Infrastructure Rollout Along Strategic Motorways
Welsh Government Announces Emergency Funding Package to Support Agricultural Sector Facing Severe Weather Impacts
High Court Rules in Favor of Environmental Coalition Over Government Carbon Reduction Plan Deficiencies
Office for National Statistics Reports Stable Retail Sales Growth Supported by Strong Digital Commerce Volumes
Scottish First Minister John Swinney Secures Cross-Party Support for Renewable Energy Export Expansion
National Health Service Digital Reports Major Breakthrough in Reducing Elective Waiting Lists Across England
Chancellor Rachel Reeves Outlines Infrastructure Spending Reforms to Boost Regional Economic Growth Across Northern England
Bank of England Holds Baseline Interest Rate at Five Percent Amid Persistent Core Inflation Pressures
House of Lords Advances Representation of the People Bill to Modernize Electoral Law Ahead of General Election
Financial Markets and Private Equity Assess Tax and Corporate Realignment Following Recent Chancellor Budget Adjustments
Justice Committee Warns Legal Aid Is a Service in Managed Decline Due to Inadequate Government Funding Responses
Royal Navy Intercepts Russian Intelligence Vessel and Warships Across Intensive North Sea Operations
Business and Trade Committee Slams Government Policy on China as Fragmented and Lacking Strategic Direction
Home Secretary Shabana Mahmood Softens Immigration Plans Following Intensive Cabinet Backlash Over Settlement Timelines
Automotive Industry Data Reveals Continued Acceleration in Battery Electric Vehicle Registrations Across British Dealerships
High Court of England and Wales Rules on Landmark Legal Challenge Regarding Local Government Housing Mandates
Department for Energy Security and Net Zero Approves Expanded Offshore Wind Infrastructure Along Scottish Coastline
Competition and Markets Authority Launches Broad Investigation Into Artificial Intelligence Infrastructure and Cloud Partnerships
United Kingdom and European Union Launch High-Level Preparations for Bilateral Defense and Security Summit in Brussels
National Health Service England Unveils Emergency Workforce Reforms to Alleviate Winter Accident and Emergency Pressures
Chancellor Rachel Reeves Finalizes Autumn Budget Adjustments to Meet Fiscal Rules and Fund Public Services
Bank of England Prepares for Interest Rate Decision Amid Rising Bond Yields and Inflationary Pressures
House of Lords Begins Detailed Legislative Scrutiny of Representation of the People Bill and Cyber Security Laws
Metropolitan Police Detain More Than Three Hundred Individuals Following Large-Scale Demonstration Outside London Embassy
Home Office Prepares Stricter Residency Rules Requiring Vulnerable Migrants to Wait Decade for Settlement Rights
Professional Mental Health Bodies Demand Statutory Regulation for Counsellors and Psychotherapists
National Grid Confirms Construction of Britain's Largest Electrical Substation to Power Teesside Data Centre
Prime Minister Keir Starmer Travels to Samoa for Commonwealth Summit Amid Debates on Economic Cooperation and Reparations
Home Office Implements Enhanced Digital Border Controls and Visa Processing Systems at Major Airports
Office for National Statistics Reports Stable Employment Participation Rates Across Regional Labor Markets
Department for Business and Trade Announces Strategic Partnership to Secure Critical Mineral Supply Chains
Scottish Government Unveils Regional Economic Development Strategy to Boost Advanced Manufacturing in Glasgow and Dundee
Treasury Officials Review Taxation Frameworks and Capital Gains Rules Ahead of Autumn Budget Disclosures
National Health Service Leaders Warn of Winter Capacity Pressures Across Acute Care Facilities
Bank of England Prepares for Key Interest Rate Decision Amid Sticky Inflation and Fiscal Policy Pressures
Home Office Expands Border Security Operations and Intelligence Sharing With European Partners
Office for National Statistics Reports Modest Retail Sales Growth Ahead of Crucial Christmas Trading Season
Welsh Government Unveils Strategic Plan to Boost Regional Technology Innovation and Digital Skills Training
Department for Environment Food and Rural Affairs Implements New Agricultural Subsidies Framework for English Farmers
×