What it is:
A hard landing refers to an abrupt downward shift in economic growth resulting from monetary policy.
How it works (Example):
Inflation historically accompanies periods of economic expansion. In the U.S., the Federal Reserve has an obligation to control inflation through monetary policy, specifically via adjusting short-term interest rates and conducting open market operations.
A hard landing can occur when a central bank raises rates excessively during a period of economic expansion. The consequent increase in interest rates places downward pressure on the demand for new loans. Companies experience a slowdown in growth and consumer confidence falls, causing the economy to contract quickly in a short amount of time.
Why it Matters:
Monetary policymakers generally try to circumvent hard landings by making incremental rate adjustments small enough to maintain consistent price levels without disturbing upward growth.