Magazine article Mortgage Banking

Economic Trends

Magazine article Mortgage Banking

Economic Trends

Article excerpt


Now it's official. The National Bureau of Economic Research - the organization that makes such designations - indicated that the recession began in July 1990. Already, GNP has declined sharply for two quarters in a row - 1.6 percent in the fourth quarter 1990 and 2.8 percent in the first quarter 1991 - and the unemployment rate has risen over 1 1/2 percentage points. Other indicators have also deteriorated significantly.

So, given that we are in a recession, how much longer will it last? There is now some evidence that it will not last much longer.

One of the key reasons is that the Federal Reserve (Fed) has not been sitting on its hands. Since the recession began, the Fed has cut the discount rate - the rate at which banks can borrow from the Fed - three times: from 7 percent to 6 1/2 percent on December 18, 1990; to 6 percent on February 1, 1991; and to 5 1/2 percent on April 30, 1991. More important, as Chart 1 shows, the Fed cut the federal funds rate - the rate banks charge one another for reserves and a rate controlled by the Fed through operations to increase or decrease total bank reserves - from 8 1/4 percent to 5 3/4 percent. These substantial moves toward ease, coupled with the Fed's encouragement of banks to make loans to creditworthy borrowers (i.e., to mitigate the credit crunch that has partly resulted from overly strict lending requirements), will contribute significantly to ending the recession.

The timing of the effects of these policy moves is difficult to gauge. Research on monetary policy suggests that Fed policy actions affect the economy with lags.

While there are some signs that the trough of this recession is near, some of the numbers still look terrible. New orders for durable goods continue to weaken. Consumer spending for autos, while above January's depressed level, remains below 1990 levels, and industrial production continues to drop along with capacity utilization. …

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