Soft Landing
You are the central banker. Tame inflation, protect jobs, guard the financial system — and keep your independence.
Each quarter you steer the economy with the tools of monetary policy. Move too slow and inflation runs away; move too hard and you crash the economy into recession. Keep money too cheap for too long and you inflate a bubble that bursts. And through it all, the public and the government are watching.
Your Tools
- Policy rate — your main lever. Raise it to cool the economy and fight inflation; cut it to revive a slump. It cannot go below 0% (the "zero lower bound").
- The balance sheet (QE) — when rates hit zero and you still need to stimulate, buy bonds to ease financial conditions. Powerful, but it inflates financial risk and must eventually be unwound.
- Forward guidance — talk hawkish or dovish to nudge expectations. Cheap, but only works if you have the credibility to back it up.
Your Mandate & Your Risks
- Prices: keep inflation near the 2% target. Jobs: keep unemployment near its 5% natural rate. The green box on the chart is where both are healthy.
- Credibility anchors expectations — high credibility makes your job easier; lose it and expectations spiral out of control.
- Financial risk builds when money is too loose for too long. Let it run too high and a bubble bursts into a financial crisis.
- Public approval falls when people suffer. If it collapses, the government strips the bank of its independence — and your term is over.
- Survive your 10-year (40-quarter) term. Defeating high inflation without a recession is the fabled soft landing.
Choose your era: