Vol. 46, No. 1
Few economists see the specter of recession as a real or near-term threat—for now. Instead, many expect the Federal Reserve Board to engineer a "soft landing" and a slower growth economy that still will generate a respectable and more sustainable annual growth rate this year—that is, as long as the Fed continues to pilot the economic engine with care.
A slew of closely watched economic reports released through late November confirmed a slower-growth pace and made a strong case for the Federal Reserve to cut interest rates this year, many economists agree.
Major U.S. banks increase or decrease their lending rates on business loans, consumer credit, etc., in tandem with Fed rates. Lowering interest rates makes borrowing less expensive for both businesses and consumers. Raising them has the effect of curtailing business expansion and spending, slowing the economy and relieving pressure on wages and benefits costs. But lower interest rates also make fixed income investments, such as bonds, less attractive—and tend to spur stock prices.
Federal Funds Rate: The rate banks charge to lend
money to other banks overnight.
Source: Federal Reserve Board
Indeed, third-quarter 2000 data showed that the U.S. economy slowed significantly while inflationary pressures abated. That combination is exactly what the Fed ordered when it began tightening interest rates in June 1999. The Fed’s Beige Book, released Nov. 1, reported a slowly decelerating economy in many regions. The economy cooled in the third quarter to a 2.4 percent annual growth rate, the slowest pace since the spring of 1999, according to the Commerce Department.
But if history is any guide, recessions often occur on the heels of a major event. The last recession, which began in July 1990, was accompanied by a huge surge in oil prices. And, notes Jeff Faux, director of the Economic Policy Institute in Washington, D.C. every major episode of inflation that cut short a recovery over the past century has been triggered by either war or increases in global oil prices.
Susan J. Wells