That Elusive Soft Landing: And the Fed's difficult circumstances.

• Author: Ullmann, Owen

As the Federal Reserve guides an economic expansion already in record territory for durability, it is striving to pull off a rare "soft landing"--moderate growth that keeps unemployment low, inflation in check, and avoids the hard landing of a recession.

The term was coined by former Fed Chairman Alan Greenspan, who pulled off the last soft landing in 1994-1995, when he and his colleagues on the Federal Open Market Committee deftly lifted interest rates just enough to dampen inflationary pressures without sending the economy crashing into a downturn.

Greenspan gets special credit for persuading the FOMC to avoid overtightening because he correctly realized that a sizeable jump in productivity was keeping inflation below 3 percent, even though unemployment fell below 6 percent and the economy continued to grow at a healthy rate of 3-plus percent. The economic consensus at the time was that the productivity boost was transitory, but Greenspan believed it had legs because of the internet-driven technology revolution. He was right. Productivity rose from a rate of 1.5 percent in the 1980s to 2.2 percent in the 1990s and 2.7 percent from 2000 until the end of 2007, when both the economy and the productivity rate collapsed.

The Fed's challenge now in piloting the economy is very different from the mid-1990s. The threat is not rising inflation, which continues to run well below the central bank's 2 percent target. Rather, the worry now is a series of dangers largely out of the Fed's control. They include an on-again, off-again trade war with China orchestrated by an increasingly impulsive and erratic President Donald Trump, a global economic slowdown caused by that trade friction, and the prospect of financial instability as a result of the mountain of new debt taken on by businesses and governments around the world because interest rates are so low.

Jeremy C. Stein, chair of Harvard University's economics department and a Fed governor from 2012 to 2014, says that a hard landing may be less likely given the low-inflation environment. "Hard landings after earlier periods of very low unemployment tended to be associated

with rising inflation, and the Fed needing to react to that inflationary pressure. That particular worry is, thus far, absent this time around."

"Now the worry is the fallout from trade," says Stein. Economists "don't have great models to assess this impact. The United States is not that open an economy, but one worries that the...