London Daily

Focus on the big picture.
Monday, Sep 28, 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
Transport for Wales and Network Rail Complete Electrification of South Wales Metro
Defra Expands Incentives for Sustainable Farming and Biodiversity in England
Northern Ireland Executive Approves Funding Package to Resolve Public Sector Pay Disputes
Universities UK Warns of Financial Insolvency Risks for Higher Education Institutions
UK Prisons Activate Emergency Protocols to Manage Capacity Pressures
UK Government Establishes New Safety Standards for Frontier AI Models
Home Office Tightens Skilled Worker Visa Requirements and Dependent Rules
Ministry of Defence Restructures Royal Navy Frigate Procurement to Prevent Overruns
UK Government Mandates New Housing Targets to Address National Shortage
UK and Scottish Governments Reach Agreement on North Sea Energy Transition
NHS Launches Digital Overhaul to Reduce Surgical Backlogs in England
Bank of England Holds Interest Rates as Service Sector Inflation Persists
UK Chancellor Announces Fiscal Consolidation Measures to Stabilize National Debt
RNLI Chief Executive Condemns Misinformation and Abuse Targeting Volunteer Crews
Metropolitan Police Charge Swindon Man with Assisting Foreign Intelligence Services
British Intelligence Report Warns Environmental Collapse Threatens Global Defense Infrastructure
Conservative Party Rejects New Taxes to Fund UK Social Care Reforms
Labour Government Signals Intent to Ease Residency Restrictions for Foreign Care Workers
Prime Minister Andy Burnham and Norwegian Prime Minister Jonas Støre Meet to Strengthen North Atlantic Defense
UK Government Plans to Revive Equity Loan Scheme to Assist First-Time Home Buyers
Prime Minister Andy Burnham Pledges Radical Reform for UK Utilities and Social Care
UK Treasury Prepares Difficult Autumn Budget Amid High Debt and Energy Volatility
Civil Aviation Authority Launches Review of Air Traffic Systems Following Digital Failure
X Reports First Increase in UK Revenues Following Advertiser Boycott
Shetland Islands Council Approves £400 Million Inter-Island Tunnel Project
Foreign Secretary Ed Miliband Warns Iran Against Hostile Activities on British Soil
UK Ministers Concede Chagos Islands Sovereignty Agreement Terminated After US Opposition
More in Common Poll Projects Hung Parliament with Labour Leading and Reform UK Gains
Prime Minister Andy Burnham Defends Economic Strategy as Public Finances Face Headwinds
Tony Blair Urges Government to Set Long-Term Goal of Rejoining the European Union
Prime Minister Andy Burnham Pledges Universal Free Social Care Funded Through General Taxation
UK Diesel and Petrol Prices Surge Near All-Time Highs Amid Middle East Energy Volatility
Analysis of Reform UK conference highlights deep political divisions over welfare and immigration
Bangladesh garment exports to the United Kingdom reach $915 million in early fiscal year
Royal Navy begins sea trials for new HMS Agamemnon hunter-killer submarine
New report suggests UK data centre expansion will create far fewer jobs than predicted
Major weekend closures announced for London Underground Piccadilly and Central lines
NHS leaders call for emergency winter funding to combat staffing shortages and rising illness
Far-right activist Daniel Thomas charged following alleged slashing of migrant dinghy
Home Secretary orders urgent review of border security following rise in small boat crossings
Prime Minister Andy Burnham to address Labour Party conference amid calls for long-term infrastructure plan
UK Treasury and Bank of England warn of rising inflation risks amid Middle East tensions
Royal Navy Diving Squadron Honoured for Global Bomb Disposal Efforts
UK State Pension Set to Approach £13,000 Per Year Under Triple-Lock
Rolls-Royce Wins Multi-Million-Pound Engine Contract with Philippine Airlines
TfL Questions Future of Heathrow Express Amid Proposed £33 Billion Expansion
Ed Miliband Warns Iran Against Hostile Operations on British Soil
S&P Global Manufacturing Index Signals Stabilization Amid Rising Fuel Costs
Prime Minister Andy Burnham Launches National Centre for Information Defence
UK Food and Drink Trade Deficit Surges to £21.1 Billion
×