With the Federal Reserve now telegraphing two additional benchmark interest rate increases in 2017, I wanted to take a more detailed look at one key phrase that appeared in the minutes of the Federal Open Market Committee meeting held on January 31 – February 1, 2017:
“A few participants noted that continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the Committee greater flexibility in responding to subsequent changes in economic conditions.”
What does this mean and why were “a few participants” expressing the need to have “greater flexibility in responding to subsequent changes in economic conditions.”?
With that in mind, let’s look at a table which shows the recessions since the mid-1950s, the interest rate peak just prior to the recession, the interest rate nadir after the recession and the percentage point and percent change in those rates, all using the Federal Funds Rate:
As you can see, the difference between the peak and nadir rates was generally quite substantial, in their arcane words, the Fed had significant “flexibility to respond to subsequent changes in economic conditions”. In the nine recessions since the mid-1950s, the Fed lowered interest rates between 2.83 and 10.59 percentage points with an average of 6.18 percent.
For those of you (like me) who are graphically oriented, here is a graph showing the percentage point difference between the pre- and post-recession Federal Funds rate for all nine post-1950s recessions:
Here is a graph showing the percentage decrease in the Federal Funds Rate from pre-recession peaks to post-recession nadirs:
On average, over the last nine recessions, the Fed lowered their benchmark rate be between 48.7 percent and 97.1 percent with an average drop of 69.9 percent. The Great Recession saw the largest percentage drop at 97.1 percent, giving us a sense of how desperate the economic situation had become.
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