what is a goldilocks economy 
a goldilocks economy is not too hot nor too cold but just right to steal a line from the popular children s story goldilocks and the three bears the term describes an ideal state for an economic system there s full employment economic stability and stable growth in this perfect state the economy isn t expanding or contracting by a large margin a goldilocks economy is warm enough with steady economic growth to prevent a recession but growth isn t so hot as to push it into an inflationary status understanding a goldilocks economythere s some debate among economists as to the exact characteristics of a goldilocks economy but it s safe to say that there should be a balance between growth employment and inflation the ideal conditions are typically characterized by the economy can dip into a recession or an economic downturn if gdp growth is too low economists say that the country is experiencing a recession when an economy registers two consecutive quarters or six months of negative gdp growth but it can lead to a surge in prices in an economy or inflation if gdp growth is too fast maintaining a goldilocks economyfiscal spending by congress is one way to help create and manage a goldilocks economy governments can boost their spending through infrastructure projects such as the creation of roads and bridges as well as by writing government contracts with private companies the use of taxes is also a tool employed to manage an economy the reduction of taxes on businesses encourages business investment consumer tax cuts encourage consumer spending but fiscal spending and tax cuts can have mixed results they re rarely a long term solution to maintaining the goldilocks economy a goldilocks economy is transitional because economic activity is a process of expansion and contraction that occurs repeatedly the boom and bust cycle is a key characteristic of capitalist economies the u s economy typically goes through five phases as part of the business cycle these stages are growth or expansion peak recession or contraction trough and recovery a goldilocks economy might happen during the recovery and growth phases it should be considered a temporary state because of the existence of the business cycles goldilocks and the central bankcentral banks are responsible for regulating money supply and the banking sector the banking authority uses monetary policy tools to bring on and maintain a goldilocks economy the federal reserve fed is the u s central bank the fed can cut interest rates spurring lending in the economy as consumers and businesses increase borrowing to take advantage of lower rates it can increase interest rates if it feels that the economy is growing too hot and inflation is rising at a faster rate than the fed s inflation target 3rising prices can hurt an economy because they tend to lead consumers to cut back on spending companies get hurt by inflation if their raw materials become too expensive because the added costs eat into their profits businesses can cut investment as a result central banks such as the fed react by increasing interest rates to slow the growth in an economy which ultimately slows or prevents inflationary pressures but their actions can trigger an economic slowdown if they raise interest rates too soon or by too much economic conditions abroad and the response from foreign governments and other national central banks can also influence whether an economy can reach a goldilocks state the goldilocks economy and investinga goldilocks economy is ideal for investing stocks perform well as companies grow and generate positive earnings growth the investor gains through share price appreciation and dividends in some cases as the business returns profits to its shareholders fixed income investments such as bonds will hold their value in the absence of inflation but the economy can overheat if gdp grows too quickly and inflation creeps up too rapidly asset prices can become overvalued in this atmosphere the fed may raise interest rates to try to cool down the economy rising interest rates break one of the key pillars of the goldilocks economy and are usually a precursor to its end real world exampleseconomist david shulman is widely considered to have coined the phrase goldilocks economy in an article published in 1992 the goldilocks economy keeping the bears at bay the u s economy of the middle to the late 1990s was considered a goldilocks economy because it was not too hot not too cold but just right a phrase that has been used to describe the ideal economy for investors the term has also been used to describe the u s economy as it recovered from the bursting of the dot com bubble between 2004 and 2005 the economy grew at 4 3 in 2005 putting the dow jones industrial average djia near multi year highs for that time 4market participants considered it to be a goldilocks economy in 2017 with the economy growing at nearly 4 employment between 3 and 4 and no real inflation in sight 56 the fed hiked interest rates later that year to keep inflation and growth at moderate levels the global economy was averaging over 3 gdp growth at the time 7