London Daily

Focus on the big picture.
Wednesday, Aug 05, 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
UK Energy Security Faces Pressure From Middle East Conflict and Red Sea Disruptions
UK Government Expands Employment Discrimination Review Amid Labour Market Changes
UK Campaigners Call for Ban on Toxic Flea Treatments Linked to Water Pollution
MI6 Ranked Europe’s Leading Foreign Intelligence Service in Independent Review
Houthi Missile Attack on Saudi Oil Tanker Raises Further Red Sea Shipping Concerns
Palantir Faces UK Tax Criticism After Paying Two Million Pounds in Corporation Tax
Advanced AI Models Show Unexpected Behaviour During UK Cybersecurity Testing
Bank of England Introduces Tougher Artificial Intelligence Testing Rules for Financial Firms
Next Raises Annual Profit Forecast to One Point Two Four Billion Pounds After Strong Summer Sales
New UK Visa Rules Tighten Skilled Worker, Student and Family Migration Routes
UK Government Proposes New Equal Pay Enforcement Powers for Employers
UK High Court Blocks Home Office Deportation Policy for Alleged Trafficking Victims
UK Health Secretary Yvette Cooper Announces Major Reform of NHS Maternity Services
BP Reports Four-Year High Quarterly Profit of Five Point Seven Billion Dollars Amid Energy Market Turmoil
Bank of England Holds Interest Rate at Three Point Seven Five Percent as UK Growth Remains Weak
Spain and Morocco Trade Blame After 72,000 Migrants Enter Ceuta
Met Police Investigated Journalist Who Questioned Cambridge Professor
Badenoch Defends Tory Candidate Jailed for Antisemitic Abuse of Luciana Berger
NHS Spends £240m a Year Storing Paper Records Despite Digital Push
Apple Seeks Court Order to Stop OpenAI Using Alleged Trade Secrets
Breaking With the Past: One of the World’s Smallest Countries Changes Its Name
AI Is Remaking the US Economy, From GDP Growth to iPhone Prices
Comcast: Tied to a Chair and Hit in the Face With Cake: The Regular Humiliation Ritual at the US Corporate Giant
Aston Martin Faces Legal Threat Over £550m Rescue Deal
Conservative Party and Reform UK Face Growing Scrutiny Over Political Transparency
GMB and Public Sector Unions Prepare for Wider Debate Over Government Priorities
UK Government Faces Pressure to Address National Water Infrastructure Failures
NHS Radiographers Report Rising Racist Abuse From Patients
Breast Cancer Experts Call for Overhaul of NHS Diagnostic Approach
UK Government Reviews Prison Policy After Debate Over Capacity and Public Safety
Nigel Farage Faces Questions Over Leadership Discussions and Five Million Pound Donation
Conservative Party Faces Candidate Controversy Over Former Antisemitic Activist
UK Energy Industry Pushes for Greater Role for Domestic Oil and Gas Production
Gatwick Expansion Debate Continues as Airport Prepares for Second Runway Construction
Reform UK Wants the Royal Navy to Return Channel Boats to France
Government Faces Pressure Over Charity Funding Linked to Illegal Israeli Settlements
UK Fire Chiefs Demand Ban on Disposable Barbecues During Severe Drought
Medical Review Warns Current Breast Cancer Guidelines Miss Many Young Women
NHS Mental Health Trust Announces Twenty-Five Million Pound Service Cuts
MI6 Rated Europe’s Most Capable Foreign Intelligence Service in International Review
UK Watchdog Finds Serious Failures in Electronic Offender Monitoring System
BP Chief Warns UK Must Protect Domestic Oil and Gas Capacity
Water Supply Crisis Threatens England’s Housing Expansion Plans
UK Government Rewrites Procurement Rules to Prioritise Jobs Over Environmental Targets
English Channel Rescue Operation Saves One Hundred Seventy-Three Migrants After Boat Capsizes
Gatwick Airport Wins Legal Approval for Second Runway Expansion
UK Government Tightens Early Prison Release Scheme After Public Backlash Over Offender Freedoms
US and Japan Step In to Support the Yen in Rare Joint Intervention
The AI Pricing Problem: Companies Cannot Predict Their Own Bills
Europe’s Heat and Drought Are Now Disrupting Power, Shipping and Tourism
×