Number: RS22371
Title: The Pattern of Interest Rates: Does It Signal an Impending Recession?
Authors: Marc Labonte and Gail Makinen, Government and Finance Division 
Abstract: 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.
Pages: 6
Date: May 5, 2008