Will Rate Hike Point to Our Next Recession?

By Nicklaus, David | St Louis Post-Dispatch (MO), August 21, 1994 | Go to article overview

Will Rate Hike Point to Our Next Recession?


Nicklaus, David, St Louis Post-Dispatch (MO)


Some say the world will end in fire, some say in ice, Robert Frost wrote.

He wasn't talking about economic forecasts, but he might as well have been. Ask a few economic soothsayers to gaze into the dark sides of their crystal balls, and you'll hear two different stories.

Those who favor fire say that the biggest risk to the economy right now is the danger of overheating. If that happens, the Federal Reserve Board will have to increase interest rates more dramatically than it already has, and might pitch the economy into recession.

The ice-is-nice crowd says we're past that point. These forecasters' main worry is that the Fed has already overreacted to threats of higher inflation, and that higher interest rates already may have cooled the economy too much.

Keep in mind that few economists expect a recession anytime soon. But many are concerned enough to be thinking about when and how one might occur.

Nearly 3 1/2 years have elapsed since the last recession officially ended in March 1991. The average expansion since World War II has lasted four years and four months. So it's time to begin pondering how long our luck will hold out.

DRI/McGraw Hill, a leading economic-forecasting firm, sees only a 20 percent chance of a recession early 1996. Its economists fall on the fire side of Frost's dichotomy, saying that the economy's worst fate would be a boom-bust scenario triggered by too-rapid growth in the next few months.

Ken Safian sees a much higher chance of a downturn next year. This ice man, head of Safian Investment Research in New York, says the rapid pace of consumer spending this year was unsustainable, and that the increase in interest rates that the Fed orchestrated last week may have been unnecessary.

"The consumers were ready to cool it all by themselves," Safian said. "Given what the Fed is doing, I think you have a 50-50 chance in 1995 of a mild recession."

While the seers try to peer into the future, a group of economists at Columbia University in New York search the past for clues about the next recession. And Anirvan Banerji, research economist at Columbia's Center for International Business Cycle Research, thinks they have found an important clue in the behavior of the prime rate. …

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