The Art of the Soft Landing

by Calculated Risk on 6/19/2025 08:13:00 AM

A year ago I wrote: The Art of the Soft Landing

A few excerpts and an updated graph …

The “Art of the Soft Landing” requires that the Fed reduce rates quick enough to keep economic growth positive, and slow enough not to reignite inflation. My view is a soft landing is achieved if growth stays positive, inflation returns to target, and the yield curve flattens or reverts to normal (long yields higher than short yields).

The Fed lowered rates and GDP growth was solid in 2024, and although GDP growth was slightly negative in Q1 2025, this was due to trade related distortions and all indications are GDP will be positive in Q2.

Inflation hasn’t quite returned to target with PCE core inflation at 2.5% YoY in April. However, inflation appeared to be on the way to the Fed’s 2% target until the trade war started.

And here is an updated graph of 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity from FRED for the last 5 years.

The yield curve is no longer inverted.

With the significant changes to policy, the Fed didn’t completely meet my definition of a “soft landing”, but it was close – and I think they deserve credit.

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