![]() In fact, the unemployment rate increased in every quarter between 1979::4 for a total increase of more than five percentage points. Although unemployment declined slightly in that same quarter, it began to rise the next quarter (1979:3) and thereafter, eventually reaching its peak of 10.7% in 1982:4. In the case of the 1979-82 recession, GDP growth began an erratic decline in 1979:2. ![]() The 1979-82 recession: Unemployment tends to lag behind rising interest rates and declining GDP growth, peaking one to two years after GDP has bottomed out ( Figure 2). Past trends would indicate that there is a significant risk of a recession in 2001.įalling growth rates eventually lead to rising unemployment More recently, between 1999::3 (not shown), the Fed increased real interest rates by about 1.2 percentage points,4 and, as anticipated, real GDP growth has since declined. This pattern indicates that the lag between higher interest rates and falling output grew from one recession to the next. GDP fell for three quarters, starting in 1990:3, representing a lag of six to seven quarters from the peak in real interest rates in 1989:2 (highlighted by the vertical bars in Figure 1). The 1989-92 recession: This recession followed a two percentage-point increase in real interest rates that began in 1988:1 and peaked in 1989:1-2. Lags between interest rate hikes and output declines are hard to measure in this period due to their volatility, but appear to lie somewhere between the first and second quarters. GDP subsequently declined for four consecutive quarters, from 1981:3 to 1982:2. Real interest rates spiked three more consecutive quarters beginning in 1980:4. The lag between the first interest rate spike and the first of the two dips in the 1979-82 recession is highlighted with a shaded bar in Figure 1 (also see Table 1 and below for further discussion of GDP and unemployment lags). GDP fell for the first three quarters of 1980, representing a delayed response, or lag, of about one quarter. Real interest rates rose by more than two percentage points in the fourth quarter of 1979 (1979:4) and by an additional three percentage points in 1980:1. 3įurthermore, sharp interest rate spikes preceded the periods of negative output growth. But since unemployment rose steadily throughout, this entire period can be viewed as one continuous recession. Real interest rates ranged from 0.5% to 9.5%, and real GDP growth from -3.1% to 4.9% per year, with both varying wildly. First, interest rates and real GDP growth were both extremely volatile in this period. The 1979-82 recession: The first of these – the so-called “double dip” recession of 1979-82 – is unusual for several reasons. 2 (Since quarterly growth rates are volatile, GDP growth is measured here using a three-quarter moving average.) The relationship between interest rates and output (gross domestic product) during the last two recessions is illustrated in Figure 1. These patterns are apparent in both of the recessions that took place between 19. 1 Second, months or years after interest rates peak, growth slows, real output actually falls, and then unemployment begins to rise. First, interest rate increases by the Federal Reserve’s Open Market Committee (FOMC) have been one important cause of recessions, with sharp increases in real (inflation-adjusted) short-term interest rates heralding a slowdown. ![]() Sharply rising interest rates usually cause recessionsĪlthough each recession is unique, they seem to share some patterns. avoids a recession, a relaxation of Fed policy now will not damage the economy. ![]() Since there are no signs of a significant, economy-wide increase in inflation, prices and wages are unlikely to surge if the Fed cuts interest rates this year. Rising energy prices, stock market instability, and several other important factors suggest that the risk of a U.S. The Fed’s sharp 1.75 percentage-point hike in interest rates in 19 has slowed the economy and may even tip it into a recession. Without swift action by the Fed, unemployment is likely to rise by at least one to two percentage points, if the economy follows the pattern of previous recessions. Given this history with past recessions, the Federal Reserve should reduce interest rates by at least two to three percentage points within the next year. In each of the past two recessions, the Fed cut real interest rates by five to six percentage points before unemployment began to decline. FED UP The Federal Reserve must lower interest rates now to avoid a recession, rising unemploymentĭespite its half-percentage-point interest rate cut on January 3, 2001, the Federal Reserve must quickly make even deeper cuts to lessen the damage it has done to the economy.
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