Can Greenspan Engineer Soft Landing?

Jan. 10 -- Everyone hopes that Federal Reserve Chairman Alan Greenspan can successfully steer the economy to a desired and elusive “soft landing.” But what, exactly, constitutes “soft?” And will we, in fact, land that way, or get a recession instead?

To start with, an actual recession is defined as two consecutive quarters of negative growth in gross domestic product (a measure of all goods and services produced).

On the other hand, a soft landing is generally viewed as a slowdown in GDP growth from 4 percent to 5 percent to just above zero, explains Kevin A. Hassett, an economist and resident scholar at the AmericanEnterprise Institute.

Added Hassett: “If you don’t slow down enough to gointo a recession, it’s a soft landing.”

By way of context, the Commerce Department, which measures GDP, recently revised down its measure of third-quarter gross domestic product from an estimated 2.4 percent pace of growth to 2.2 percent. That’s down sharply from the blistering 5.6 percent pace set in the second quarter, and is the slowest growth in four years. But it’s far from a recession.

Greenspan Taps the Brakes

With the economy in high gear for several years running and high growth threatening to push up prices for goods and services, the Fed raised interest rates six times between June 1999 to May 2000 to keep the economy from overheating.

Then, perhaps persuaded that the brakes had been applied too forcefully, the Fed on Jan. 3 cut a key interest rate by a half-point, saying that a recession, not inflation, posed the bigger economic risk.

That last move follows a wave of economic signals, including weak corporate earnings and deteriorating consumer confidence, suggesting the slowdown was occurring with unexpected speed.

Win Some, Lose Some

The Fed’s aim is to slow the economy enough to stimulate a modestincrease in unemployment, says Mark Zandi, chief economist atEconomy.com, a Web-based provider of economic research.