The Rate Debate
Pickering, C. J., Vining, Jim, Independent Banker
Projecting where rates are headed-a historical analysis
Talking about projected rates in this column is dicey at best, especially considering it's being written six weeks before publication. It also helps if time passes and people hopefully forget what was said. No such luck when the predictions of two months ago are not published until after the predicted event.
Oh well, mom never said life was easy.
Since 1950, there have been six recessions as defined by at least two quarters of contracting GDP (gross domestic product):
* 1953-1954: Three quarters
*1958: Two quarters
* 1969-1970: Two quarters
* 1974-1975: Three quarters
* 1981-1982: Two quarters (Six of 10 quarters contracted, but no more than two sequential quarters)
* 1990-1991: Three Quarters
Below, we'll examine the rate cycles during these recessions to see if there is any information that can be applied to the 2001-2002 recession.
Historical Rate Cycles
The charts below show the rate cycles in each of the last four post-recession periods. Following the 1991-1992 recession, for example, it took 23 months for fed funds rates to hit bottom and 27 months for five-year Treasury rates to bottom out. It then took an additional 17 months for fed funds rates and 12 months for five-year Treasury rates to rise 1 percent from their post recession lows.
Following the past four recessions, rates took an average of 17.8 months to hit bottom and an additional 8.9 months to rise 1 percent from their post-recession lows. The least amount of time was following the 1969-1970 recession when rates hit bottom after 14 months and were 1 percent higher than their post-recession lows within two to four months.
The recovery period from the 2001-- 2002 recession could be different because rates are so low already, lower, in fact, than the previous five recessions dating back to 1958. However, the Federal Reserve's Federal Open Market Committee minutes of Oct. 2, 2001, say, "Even after a 50basis-point reduction (to 2.5 percent), the federal funds rate would not reflect an unusually accommodative policy stance in that, in real terms, it would still be positive by many measures and above its typical level in most earlier periods of economic weakness. …