James B. Bullard

English

Research Papers in Economics

NationalEconomicTrends
November 2001
Ahead of the Curve
Many analysts have concluded that the U.S. econ-
omy entered a recession in the last few months. The
historical pattern is that the Federal Reserve reacts to
a weakening economy with a lower target for its mone-
tary policy instrument, the federal funds rate. This
suggests that if a typical recession does unfold in the
coming months, short-term interest rates will move
considerably lower. But there is an important difference
this time compared with the last recession, which
ended more than a decade ago. The difference is that
this time the Fed began lowering its target aggressively
in January 2001, well before the onset of recession,
whereas in the 1990-91 episode, the Fed was essentially
on hold as the recession began and, indeed, until it was
well underway.
The Figure shows the Federal Open Market Com-
mittee’s (FOMC’s) target level for the federal funds
rate, as a percentage of its initial level, nine months
before and after July 1990, the official date for the
beginning of the 1990-91 recession. (For example, 70
percent means that the target rate had fallen 30 percent
from the level that prevailed nine months before the
onset of recession.) For the current episode, no official
beginning date has been established—and indeed there
is still at least some possibility that no part of 2001 will
be classified as a recession. But, for the purposes of
discussion, let us suppose that a recession will even-
tually be dated as beginning in July 2001.
The Figure indicates that the Fed was essentially on
hold during the first six months of 1990 and remained
committed to a pre-recession level of the target federal
funds rate until October of that year, four months after
the recession began. At that point, as it became clearer
that a recession was underway, the Fed began lowering
its target more aggressively. The target federal funds
rate eventually reached a cyclical low of 3 percent by
September 1992—27 months after the recession onset.
In contrast, during the current episode, the Fed began
an aggressive lowering of the federal funds rate target
in January of this year, well before any likely beginning
recession date and six months before the provisional
date we have adopted for purposes of discussion. The
Fed thus has taken a far more preemptive stance dur-
ing the current period as compared with the 1990-91
period.
What accounts for the difference in the two
episodes? Probably the main difference is that inflation
was kept under better control during the expansion of
the late 1990s, whereas inflation had crept to unaccept-
ably high levels during the late 1980s. The chain-type
personal consumption expenditures price index rose
at rates between 4 and 5 percent from the previous
year during most of 1989 and 1990. The same index
has risen at an annual rate of less than 1 percent dur-
ing the first eight months of 2001. Low and relatively
stable inflation has given the FOMC more room to
lower its federal funds target than it had in 1990, when
inflation was relatively high and rising.
—James B. Bullard
Views expressed do not necessarily reflect official positions of the Federal Reserve System.
www.stls.frb.org/research
Federal Funds Rate Target (as a percentage of initial level)
0
20
40
60
80
100
120
Recession Onset 
NOTE: End of month federal funds rate target set by the FOMC.  Upper line 
represents rate relative to October 1989. Lower line represents rate relative to 
October 2000.
  SOURCE: Federal Reserve Board.
October 1989-April 1991
October 2000-October 2001
Oct  Nov Dec  Jan   Feb  Mar Apr  May  Jun   Jul  Aug  Sep Oct  Nov Dec   Jan  Feb  Mar Apr

Ahead of the curve

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Ahead of the curve

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Research Papers in Economics