However, as The Brookings Institution, a conservative think tank, explained, the Fed became concerned that rapid growth and fast-shrinking unemployment might trigger an increase in inflation. Unemployment had dropped, inflation was below 3% and the federal funds rate sat at 3%. economy entered a period of unprecedented growth. Once it had rebounded from the 1990-1991 recession, the U.S. In response, the FOMC initiated a series of rate drops, decreasing the federal funds rate from 8.25% to 8% in July 1990 to 3% by September 1992. In addition, the country faced a major budget deficit and a credit crunch that made loans difficult to get, even for businesses. Other industries were also affected as consumer confidence fell and businesses reduced spending.Īt the same time, a spate of savings and loan failures that began in 1980 and peaked in 1987 prompted Congress to enact a bailout legislation that cost American taxpayers as much as $124 billion, according to the Federal Reserve.Īs Greenspan had predicted it might, a recession ensued, complete with rising unemployment. Despite relatively inconsequential oil shocks following Iraq’s invasion of Kuwait, the airline industry was hit hard by soaring jet fuel prices and a sharp decrease in trans-Atlantic flights. might be headed toward recession, according to a 1990 New York Times report. A new cycle begins with the next expansion, which signals recovery from the trough.Ī Better Way to Bank 1990-1992: The Gulf War RecessionĮven before the Gulf War, Alan Greenspan, then-chair of the Federal Reserve, warned that the U.S.If it’s significant enough and lasts long enough, it can lead to recession.

The trough is the lowest point of the contraction.

The COVID-19 pandemic was the most recent. Contractions are triggered by one or more events that put an end to the expansion.

Contraction is when output declines, resulting in reduced GDP.

It signals the end of expansion and the beginning of contraction.

The peak is the maximum degree of expansion that occurs in a cycle.

It typically supports the maximum employment and stable prices the FOMC tries to maintain. Expansion brings higher employment levels, higher spending and lower interest rates.

Expansion occurs when the gross domestic product increases - that is, when the country produces increasing amounts of goods and services.

The economy tends to run in economic, or business, cycles. Monetary Policy, the Federal Funds Rate and the Economy

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