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short essays and reports on the economic issues of the day
2003 ■ Number 25

Monetary Policy in Jobless Recoveries
Michael R. Pakko
he relatively slow pace of economic growth during the
current recovery—particularly the sluggish performance of labor markets—has inspired numerous comparisons to the “jobless” recovery that followed the 1990-91
recession. While there are some striking similarities between
the two episodes, each recession is unique and one should not
carry comparisons too far. Nevertheless, it is interesting to
consider similarities and differences in the responses of monetary policy during the two recoveries.
Based on the official dating by the National Bureau of
Economic Research, both the 1990-91 and 2001 recessions
lasted for eight months. Both recessions were relatively mild
compared with previous economic downturns, and both were
followed by recoveries that did not display the typical rapid
bounce-back in growth and employment. Following the business cycle trough of March 1991, cumulative growth in private
nonfarm payroll employment remained negative for 18 months.
Similarly, cumulative employment growth during the 21 months
since the November 2001 turning point has also been negative.
By at least one measure, the stance of monetary policy
during these recession/recovery periods has been similar as
well. The chart shows a measure of the “real” federal funds
rate—the spread between the federal funds rate target established by the Federal Open Market Committee (FOMC) and
the inflation rate, measured here as the previous 12-month
change in the core personal consumption expenditures (PCE)
deflator. This measure shows that the FOMC progressively
eased policy during both recessions. In the periods following
these recessions, the real federal funds rate ultimately declined
to below zero and remained near zero for several months.
The chart also shows an important difference in the real
funds rate behavior: During the most recent recession, the
FOMC lowered the federal funds rate target more rapidly
than it did in the previous recession. Between July 1990 and
March 1991 the funds rate target was reduced eight times for
a cumulative total of 225 basis points. A series of further small
rate cuts lowered the funds rate an additional 2 percentage
points by the end of 1991, bringing the real federal funds rate
down to zero. Three more rate cuts followed in 1992, which
maintained a real funds rate near zero as inflation declined.


During the more recent recession, the FOMC also reduced
the funds rate target eight times, but in larger increments.
Rate cuts in March through November 2001 reduced the target
by 350 basis points, bringing the real funds rate close to zero
by the trough of the recession. Additional rate cuts in December
2001, November 2002, and June 2003 reduced the funds rate
another percentage point.
The timing and magnitude of policy changes during these
two episodes are significant because monetary policy is
thought to affect the economy with a lag. Ultimately, the sluggish recovery of the early 1990s gave way to the rapid expansion later in the decade, but it wasn’t until February 1994—
nearly three years after the trough of the recession—that the
expansion had picked up noticeable momentum and the FOMC
began raising the funds rate target. Despite the lackluster performance of job growth, the recovery from the 2001 recession
has already begun showing signs of picking up momentum.
Many factors contribute to ongoing macroeconomic developments, but the Fed’s relatively rapid and forceful response to
deteriorating economic conditions during the 2001 recession
is one factor that might help make this jobless recovery shorter
than the previous episode. ■

Federal Funds Rate Target Less Core Inflation

1991 Trough

2001 Trough
–20 –16 –12



8 12 16
Months from Trough

Views expressed do not necessarily reflect official positions of the Federal Reserve System.