Translated by: Liu Jiaolian
Article Source: Ryan McMaken from the “Mises Institute”
Title: “The Real Story Behind the Fed’s “Soft Landing” Narrative”
The Federal Reserve’s expectations for rate cuts this year are escalating. With the impending need to roll over US Treasuries in the second half of the year, how will they find buyers? Contrary to popular belief, the Fed’s insistence on high interest rates is to make it easier to sell US Treasuries, thus aiding the US federal government in financing deficits to support massive expenditures on domestic social welfare and foreign aid for wars. Once the Fed presses the rate cut button, capital will flow out of the US, leaving a surplus of US Treasuries with no takers. To provide an extra layer of security, the Fed quietly initiated a slow downscaling of its balance sheet in June to facilitate direct purchases of US Treasuries and promote their sale.
What does “harvesting” mean? The term “harvesting” consists of the words “harvest” and “cut.” One harvest, one cut, first harvest then cut. If you harvest but don’t cut, or want to cut but haven’t harvested, that’s a failed harvest. In this round of interest rate hikes, the Fed first used a combination of high interest rates, enticement, and geopolitical turmoil to achieve the “harvest,” bringing back a large amount of US dollar capital domestically and diverting it back to US Treasuries or the US stock market. The main focus now is to capitalize on the last window of opportunity to reap what has been sown. The so-called “cut” is to steer the returning capital towards US Treasuries, using zero-cost printed US Treasury paper to exchange for your hard-earned money. If we were to give “harvesting” a more elegant term, I believe it would be what the Austrian School of Economics masters refer to as “misallocation of capital.”
The Federal Open Market Committee (FOMC) kept the policy target rate (federal funds rate) unchanged at 5.5%. Since July 2023, the target rate has remained steady at 5.5% – the Fed is waiting, hoping for the best. During Wednesday’s FOMC press conference, Powell (Chairman of the Fed) continued to convey the soothing messages he usually delivers at these meetings over the past year. The overall message he conveyed was that the economy is moderate but steadily growing, employment trends are “strong,” and inflation is slowing down.
Powell then combined this economic view with the overall narrative of Fed policy, stating that the FOMC will maintain stability until the committee believes inflation is returning to the “long-term 2% inflation target.” Once the Fed is “confident” that the target inflation level has been achieved, they will begin cutting the target rate, leading the economy into another expansion phase.
Despite this, Powell and the FOMC still believe that there will not be a major upheaval, achieving a “soft landing.” In other words, Powell and the Fed repeatedly assure the public that while the Fed will lower price inflation, it will also ensure continued stable economic growth and robust employment.
However, this narrative has two issues. Firstly, the Fed has never really achieved this – at least not in the past 45 years. The reality is that the Fed has consistently denied an impending economic recession until it has already begun. Then, the Fed cuts rates only after the unemployment rate has started to rise.
The second issue with this narrative is that the Fed’s motivations are not solely based on concerns about employment and economic conditions. Yes, the Fed may make us believe that it only cares about interpreting economic data fairly, and that its policies are guided solely by this. The Fed claims that being “data-driven” means this. In reality, the Fed is entirely concerned with something else: lowering interest rates so that the federal government can continue to borrow large sums of money at low rates. The more the federal government increases its massive debt, the more pressure the central bank faces to maintain low rates and drive them down.
Yes, the Fed is indeed fearful of price inflation because it can lead to political instability. When this fear dominates, the Fed will raise interest rates. However, the Treasury Department also wants the Fed to keep interest rates low for the elites in the federal government who are constantly pushing for deficit spending. When the demand for deficit spending wins out, the Fed will be compelled to lower rates. These two goals are directly contradictory. Unfortunately, if the Fed must choose between the two, it is likely to opt for lowering rates and allowing price inflation.
How does a “soft landing” actually happen?
Let’s first examine the myth of a “soft landing.” At least since the economic recession of 2001, discussions about a “soft landing” have been common in the US media. For example, as early as July 2001, Bloomberg’s authors were speculating about how soft the landing would be. In the end, the economy did not experience a soft landing, and Dot-Com companies quickly went bankrupt.
Before the Great Recession, the notion of a “soft landing” was even more prevalent. By mid-2008, after the economic recession had already begun for several months, Fed Chairman Ben Bernanke predicted that the economy would experience a soft landing without a recession. In that recession, the unemployment rate reached 9.9%.
We are now witnessing a similar trend. Just by looking at the Federal Reserve’s Summary of Economic Projections (SEP), Fed officials persistently claim that there will be no economic recession and that economic growth will continue on a slow, steady, and positive trajectory. Yes, the SEP indicates that the Fed will soon start cutting rates, but in this fantasy version of the economy, continuous economic growth and stable employment will follow.
However, real life is not as rosy. For instance, note that in the past 30 years, rate cuts by the Fed have not ended in a “soft landing,” but rather have occurred right before the most severe periods of unemployment. As seen in the chart, the
