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Bracing for a soft landing
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August 17, 1999: 5:29 p.m. ET
Greenspan seen steering the economy through another controlled slowdown
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - "Soft landing." They are the two words that analysts, economists and Federal Reserve officials typically avoid at all costs when describing the outlook for the U.S. economy.
Just as the pilot of an airplane will do his or her best to glide perfectly onto a runway and make the transition from 500 miles an hour to zero less bumpy, the Fed does its best to ensure the economy doesn't bump and grind to a halt, or worse, break into pieces on impact.
And as any economist or pilot will tell you, it's quite difficult to achieve. Yet the economy appears to be headed for exactly that, with Tuesday's report that consumer prices remained in check in July providing another sign to financial markets that sustained economic growth is not prompting excessive inflation.
"It's not a term people throw around because it's incredibly hard to do, but it does appear that we're headed for a soft landing," said Steve Slifer, a senior economist at Lehman Brothers in New York. "What we're looking for is for economic growth to gradually moderate in the months ahead, with inflation remaining under control."
A minor adjustment
Bonds rallied on Tuesday's low-inflation news as investors concluded that Fed policy makers will nudge short-term interest rates up only one more time, if at all, to cool economic growth and ensure the spark of inflation doesn't ignite a fire. Stocks didn't fare as positively, though bank issues and other shares sensitive to interest rate changes performed well.
Since the Fed decided to push the red button and raise rates by a quarter point to 5 percent in late June, the tea leaves that form themselves into little clumps with each new economic release have been difficult to interpret, at best.
On one hand, a spate of economic reports of late have suggested inflation is about to make its Wall Street debut. Reports of surging retail sales, rising wages and labor costs, slowing productivity growth and consistently low unemployment all suggested the days of stagnant prices are over.
On the other are indicators that suggest inflation remains benign. Producers' costs are still stagnant, inventories in many industries are actually building up as more goods stay on factory shelves, orders for big-ticket items such as cars and boats are slowing and new housing starts, while strong, are beginning to show signs of easing as higher bond yields push mortgage rates to the 8-percent level.
Some mixed signals
"It really is a mixed bag right now," said Dick Berner, senior economist at Morgan Stanley Dean Witter in New York. "There's a school of thought that says the economy has already slowed, and I'm not so sure. And there's another big school of thought that says it hasn't slowed at all, and I'm not so sure about that either."
If Fed Chairman Alan Greenspan is snapping on his gloves and buckling his helmet to begin the soft-landing descent, he's not giving any tell-tale signs. In recent testimony to Congress the Fed chief made it crystal clear to the investing public that he still a firm believer in technology fueling gains in productivity, which helps keep prices low.
At the same time, if Greenspan does put the gloves and helmet on, it won't be the first time. After dramatically lowering rates in the late '80s and early 90s following the savings and loans crisis, the Fed chief orchestrated a series of rapid rate hikes to keep the economy from chugging along too quickly. In one year he moved the benchmark fed-funds rate to 6 percent from 3.25 percent.
In the end, the economy slowed, with gross domestic product resting at 1.9 percent by the second quarter of 1995. But the economy never stopped expanding completely, allowing the economy to continue on an uninterrupted path of expansion, which now has reached its ninth year.
Another perfect landing?
"Greenspan's objective is to keep the U.S. economy expanding for as long a stretch as possible," said Rob Palombi, a senior economist at Standard & Poor's MMS in Toronto. "That's why he's being so prudent in his speeches and that's why he'll adjust monetary policy to allow for that."
To ease the U.S. economy into a lower gear, economists say, Greenspan needs to convince spend-happy U.S. consumers to hold on to their hard-earned cash.
The country's personal savings rate -- a measure of how much Americans' personal incomes are being put aside rather than squandered on purchases -- rested at minus 1 percent in June, suggesting U.S. consumers are spending more than they earn.
Higher mortgage rates are one serious deterrent. Higher rates on credit cards, car loans and lines of credit are another -- all of which happen if the Fed opts to raise rates again at its Aug. 24 meeting. Banks typically raise their prime lending rates and other interest rates in tandem with the Fed's move on its benchmark rate.
Internal rather than external
Like 1994, it does appear that the Fed is bracing to rein in the economy without snuffing out growth completely, a feat only the omnipotent Greenspan has been able to achieve with success, according to some economists.
The difference between the savings and loan crisis of 1994, Asia's mess in 1997, Russia's problems in 1998 and now, is that this time around it's about what's going on inside, not outside the U.S., said Kathleen Gaffney, a fixed-income portfolio manager at Boston-based Loomis Sayles & Co.
"Last summer we had a really illiquid bond market because the market was nervous about weakness in the global economy," Gaffney told CNNfn. "These days it's an illiquid market again but the concern is more about the strength of the economy."
That's why most economists still believe the Fed will raise rates next week by a quarter point. The question now is how many more times beyond next week the Fed will have to move to ensure the soft landing so many are hopeful for but so few are willing to talk about, Lehman's Slifer said.
"A soft landing can be achieved, I have faith," Slifer said. "The question is how much fine tuning they'll have to do to get there and whether or not it accidentally turns into a crash." 
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