The Pattern of Interest Rates in 2006: Could It Signal an Impending Recession?

Publication Date: February 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

The cyclical behavior of the economy is of great interest to Congress, yet the onset of an economic downturn is seldom recognized immediately. Recognition can take more than a year and is based on the accumulation of considerable supportive data. The behavior of interest rates may provide advanced warning of an impending downturn. Following six of the past seven episodes in which the federal funds rate -- the interest rate used by the Federal Reserve to conduct monetary policy -- rose above the level of interest rates on all maturities of U.S. Treasury securities, the U.S. experienced an economic downturn. The exception occurred in 1998. A similar pattern might now be emerging as the Federal Reserve raises the target rate for federal funds. Should historic patterns continue and an actual inversion occur, it might signal an impending economic contraction. This report will be updated as events warrant.