Landing . . . Landing . . . Landed!

Chart of the Week for Jan 5-11, 2001

As the economy started to grow robustly in the early 90’s, the expansion was accompanied by—and, to a certain extent, caused by—voracious consumer spending and borrowing. Worrying that such attitude might cause the economy to overheat, the Federal Reserve engineered a series of interest rate increases to keep the economy growing at sustainable rates without inflationary pressures. If there was any doubt as to whether the Fed’s policy would have the desired effect, that doubt was removed last week.

The National Association of Purchasing Managers (NAPM) Index lost 4 points to 43.7 in December, the fifth consecutive decline and the lowest figure since January 1991. Though the unemployment rate remained at 4.0%, the decline in the NAPM index and several other factors convinced the Fed that it was time for a rate cut. After keeping the Fed funds rate— the rate banks charge one another for overnight loans— at 6.5% for seven months, the Federal Reserve lowered it by 50 basis points.

This change of policy makes it possible for the expansion to continue, as companies who scaled back on borrowing may consider new investments and expand operations.

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