The 1994 Analog

One of the themes that has clearly developed over the past few weeks, and has become more explicit in Fed rhetoric since the March FOMC is, the 1994 analog is a good one for the current situation. As Powell noted in his speech on Monday (even though he disagreed), many have argued that 1994 episode is the only successful soft landing in the post war period.

For the Fed, the 1994 playbook is becoming especially relevant:

Bullard yesterday: Asked how quickly the Fed should move, Bullard said “faster is better,” adding that “the 1994 tightening cycle or removal of accommodation cycle is probably the best analogy here.”

Powell NABE speech: I hasten to add that no one expects that bringing about a soft landing will be straightforward in the current context—very little is straightforward in the current context. And monetary policy is often said to be a blunt instrument, not capable of surgical precision. My colleagues and I will do our very best to succeed in this challenging task.

In the 1994 rate hiking cycle, inflation fell but growth really didn’t. In fact, in Alan Blinder’s Princeton University presentation from this year (which was a footnote in Powell’s speech this week), he called it the “perfect soft landing.”

So what happened to markets and the economy in 1994?