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The Pattern of Interest Rates in 2006: Could It Signal an Impending Recession?, Date: February 2, 2006 1 (February 2, 2006)

handle is hein.tera/crser0194 and id is 1 raw text is: Order Code RS22371 February 2, 2006 CRS Report for Congress Received through the CRS Web The Pattern of Interest Rates in 2006: Could It Signal an Impending Recession? Marc Labonte and Gail Makinen Government and Finance Division Summary The cyclical behavior of the economy is of great interest to Congress, yet the onset of an economic downturn is seldom recognized immediately. Recognition can take more than a year and is based on the accumulation of considerable supportive data. The behavior of interest rates may provide advanced warning of an impending downturn. Following six of the past seven episodes in which the federal funds rate - the interest rate used by the Federal Reserve to conduct monetary policy - rose above the level of interest rates on all maturities of U.S. Treasury securities, the U.S. experienced an economic downturn. The exception occurred in 1998. A similar pattern might now be emerging as the Federal Reserve raises the target rate for federal funds. Should historic patterns continue and an actual inversion occur, it might signal an impending economic contraction. This report will be updated as events warrant. Recessions and the Pattern of Interest Rates The dating of an economic downturn occurs after the event has happened. The National Bureau of Economic Research (NBER), the nonpartisan, nonprofit think tank that dates the business cycle for the United States, often waits a considerable period of time before it declares that a cyclical peak or trough occurred in a particular month of a particular year.1 Furthermore, gross domestic product (GDP) data are issued with a lag, and often do not show evidence of a downturn until the data have been later revised. Yet, the cyclical behavior of the economy is of great interest to Congress: it not only affects the position of the federal budget, but could potentially be mitigated by well-timed policy changes. Clearly there are circumstances under which the early identification of an impending downturn may be advantageous. The structure of interest rates may provide an advanced warning of an impending downturn. Typically, interest rates are higher on securities with a longer time to maturity. 'For example, the NBER announced in July 1983 that the U.S. had reached a cyclical trough in Nov. 1982; it announced in Apr. 1991 that a cyclical peak had been reached in July 1990; it did not announce the Mar. 1991 trough until Dec. 1992; and it announced in late Nov. 2001 that the longest economic expansion in American history peaked in Mar. 2001. Congressional Research Service oe The Library of Congress

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