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The Pattern of Interest Rates: Does it Signal an Impending Recession?, Date: May 5, 2008 1 (May 5, 2008)

handle is hein.tera/crser0195 and id is 1 raw text is: Order Code RS22371 Updated May 5, 2008 ~ CRS Repo for Congress The Pattern of Interest Rates: Does 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 promptly. Recognition can take more than a year after the fact and is based on the accumulation of considerable supportive data. Therefore, policymakers frequently search for reliable recession predictors. 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 to conduct monetary policy - rose above the level of interest rates on all maturities of Treasury securities, the United States experienced an economic downturn. The exception was in 1998. Following a period of monetary tightening by the Federal Reserve, a similar inversion pattern prevailed from mid-2006 to late 2007. The easing of monetary policy in evidence since September 2007 is consistent with efforts to forestall or minimize an economic downturn. Economic growth has been low since the last quarter of 2007, and some forecasters are now predicting a recession in 2008. 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.' Furthermore, gross domestic product (GDP) data are issued with a lag, and from time to time do not show evidence of a downturn until the data have been 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 remediated by well-timed policy changes. For example, Congress is currently contemplating a fiscal ' For example, the NBER announced in July 1983 that the United States had reached a cyclical trough in November 1982; it announced in April 1991 that a cyclical peak had been reached in July 1990; it did not announce the March 1991 trough until December 1992; and it announced in late November 2001 that the longest economic expansion in American history peaked in March 2001. Congressional Research Service The Library of Congress Prepared for Members and Committees of Congress

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