NCPA - National Center for Policy Analysis

2000 Interest Rate Hikes Mean A Harder Landing In 2001

December 27, 2000

Since monetary policy affects the economy only with a lag, says Bruce Bartlett, the rate of growth in 2001 will be determined by actions the Federal Reserve Board has already taken.

Fed Chairman Alan Greenspann is telling us not to worry, that he will engineer a soft landing. But as with the recession during the term of President Bush, pere, it appears this will not be the case.

  • The Fed brought on the 1990-91 recession; then, as now, Greenspan was worried that the economy was growing too fast.
  • The Fed began tightening monetary policy in March 1988 -- raising the federal funds interest rate from 6.5 percent to 9.75 percent in February 1989.
  • Consequently, economic growth was zero in the third quarter of 1989.
  • Then the Fed began to ease monetary policy, dropping the fed funds rate -- but did so in tiny increments of a quarter of a percentage point.

Not surprisingly, the economy did not respond, and by the middle of 1990, was in a full scale recession. But as late as October 1990, Greenspan told fellow Fed members, "The economy has not yet slipped into a recession." He was wrong. According to the National Bureau of Economic Research, the recession officially began in July 1990, ending in March 1991.

At the recession's trough, when the economy was declining at a 3 percent annual rate, Greenspan still had the fed funds rate at 6 percent.

Recently, the Fed has been tightening monetary policy, raising the fed funds rate to 6.5 percent since June 1999. Its December 19 statement said, "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." That is as close as the Fed ever gets to predicting a recession and that is why the stock market crashed afterwards.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 25, 2000.


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