Business Library: Gemini, Copilot, ChatGPT Knowledge Base

Summarize: Blinder, A. S. (2023). Landings, Soft and Hard: The Federal Reserve, 1965–2022. Economic Perspectives, 37(1), 101–120. https://doi.org/10.1257/jep.37.1.101

Main ideas:

• The main idea of the document: The document is about the history of the Federal Reserve's monetary policy tightenings since 1965 and how they affected inflation and economic activity. The author argues that soft and softish landings have been more common than hard ones, except when the Fed faced extreme inflation or bad luck. He also discusses the goals and definitions of monetary policy, the challenges and dilemmas that the Fed faces, and the lessons that can be learned from the past episodes.
   
• The factors that influence the Fed's policy decisions and the outcomes of tightenings: The Fed's policy is guided by a dual mandate of pursuing maximum employment and stable prices, and it adjusts the federal funds rate to influence aggregate demand and inflation. The author explains that the Fed faces challenges such as the long and variable lags of monetary policy, the external shocks to aggregate supply, and the uncertainty about the natural rate of unemployment and the neutral real interest rate. He also notes that the Fed's inflation target has changed over time, from being secretive and vague in the 1960s and 1970s to being explicit and numerical in the 2010s.
   
• The summary of the eleven tightening episodes: The author reviews the eleven episodes of monetary tightening since 1965 and evaluates their impact on inflation and the real economy. He classifies the episodes into soft, softish, and hard landings, depending on the severity of the recession or slowdown that followed. He also considers the role of luck, fiscal policy, and supply shocks in shaping the outcomes. He provides a table that summarizes the main features and results of each episode. Some of the key findings are: the 1965-1966 and 1983-1984 episodes were soft landings that did not cause a recession; the 1993-1995 episode was a perfect soft landing that stabilized inflation and kept growth strong; the 1972-1974, 1977-1980, and 1980-1981 episodes were hard landings that involved high inflation, severe recessions, and major supply shocks; the 1988-1989 and 2004-2006 episodes were softish landings that led to mild recessions, but were affected by external events such as the Gulf War and the financial crisis; the 1967-1969 and 1999-2000 episodes were also softish landings, but involved fiscal contractions and credit controls; and the 2015-2019 episode was followed by a hard landing caused by the COVID pandemic.
   
• The author's conclusion and perspective on the current tightening cycle: The author concludes that the Fed has shown itself capable of engineering a soft landing when the inflation problem is not too extreme and when it does not face major adverse events. He also suggests that the Fed's dual mandate pushes it to attempt a soft landing whenever possible. He acknowledges that the current tightening cycle, which began in March 2022, is challenging due to the COVID-induced supply disruptions, the oil shock, and the food shock. He says that the Fed will need to be skillful to achieve a soft landing under these circumstances. He also notes that the Fed's policy response will depend on how high the inflation rate was before the tightening, how long and variable the policy lags are, and how the external environment evolves. [532 Words]