Federal Funds Rate History: Hikes, Cuts, and Policy (2024)

Understanding the Federal Funds Rate

The Fed is the central bank of the United States. Established in 1913, it aims to provide the country with a flexible, safer and more stable monetary and financial system. The Fed plays a crucial role in overseeing monetary policy, regulating banks and maintaining financial stability in our country.

Benchmark Interest Rate

One of the primary tools the Federal Reserve uses to implement monetary policy is the federal funds target rate. The federal funds target rate is the interest rate at which banks lend reserves to each other overnight. It is considered a “benchmark rate” because other interest rates in the economy are benchmarked (or adjusted) to follow the federal funds rate.

The Fed adjusts the federal funds interest rate to balance two priorities:

• Maximizing employment
• Stabilizing prices

If unemployment rates are high and economic activity is low, the Fed will lower the federal funds interest rate to stimulate spending. Conversely, if inflation is rising too quickly, the Fed may raise interest rates to restrict borrowing and cool the economy.

Historic Highs and Lows

The federal funds rate reached its historic peak in the 1980s, hitting 22% in December of 1980. This high interest rate was a response to the persistent inflation of the 1970s and eventually worked to bring inflation back under control. These drastic rates did lead to a recession, but this monetary policy also set up an economic recovery that allowed markets to stabilize and grow over the next two decades.

The past 23 years have experienced historically low interest rates, with interest rates dropping to near-zero levels in both 2008 and 2020. These rate slashes were an attempt to stimulate the economy after the housing market crash sent the globe into the Great Recession in 2007 and the COVID-19 pandemic shuttered businesses worldwide in 2020.

Highest Historic Fed Funds Rate

The FOMC’s policy decision to increase interest rates in the 1980s was prompted by the need to combat high levels of inflation that had been plaguing the U.S. economy for several years. During the late 1970s and the early 1980s, inflation in the United States reached double-digit levels, peaking at 13.5% in 1980. This high inflation eroded the purchasing power of consumers and undermined confidence in the economy’s stability.

To address the inflationary spiral, then Federal Reserve Chairman, Paul Volcker, implemented a series of aggressive monetary policy actions, which included raising the federal funds rate to historically high levels.

Impact of Rate Increase

The higher cost of borrowing dampened economic activity and contributed to a slowdown in growth leading to a severe recession in the early 1980s. The U.S. economy experienced a sharp downturn, marked by the following:

• High unemployment rates
• Declining output
• Widespread business failures

Despite the short-term pain of the recession, the Fed’s action ultimately succeeded in bringing inflation under control. By raising interest rates to unprecedented levels, the Fed effectively reduced the growth of the money supply and stabilized inflation expectations.

The Fed’s commitment to fighting inflation in the 1980s laid the foundation for a more stable economic environment in the decades that followed. By demonstrating its resolve to maintain price stability, the Fed bolstered confidence in the U.S. economy and established a reputation for sound monetary policy management, as then-Federal Reserve vice chairman Roger W. Ferguson, Jr. said in a 2005 speech.

Lowest Historic Fed Funds Rate

The period from 2008–2015 saw significant economic turbulence and challenges following the global financial crisis of 2007–2008 and ensuing Great Recession. This crisis originated in the U.S. housing market and quickly spread to financial markets worldwide. It led to the collapse of major financial institutions, a freeze in credit markets and a severe contraction of economic activity.

The United States experienced a deep recession, officially lasting from December 2007 to June 2009, resulting in the following:

• Contracting GDP
• Soaring unemployment
• Plummeting housing prices
• Consumer confidence hitting rock bottom
• Banks and financial institutions facing liquidity problems and tightening lending standards

In response to the crisis, governments and central banks around the world implemented unprecedented monetary and fiscal stimulus measures to stabilize financial markets and support economic activity. In the U.S., the measure included the Troubled Asset Relief Program (TARP), fiscal stimulus packages and an aggressive monetary policy from the FOMC.

Impact of Rate Decrease

The measures were successful over time. The low interest rates decreased the cost of borrowing and consumers and businesses began to take out loans again, growing the economy. The lower interest rates also gave households and businesses the opportunity to service their existing debt, reducing financial strain and helping to prevent defaults.

One potential downside of prolonged low interest rates was the risk of inflationary pressures building up over time, but during this period, inflation remained relatively subdued due to weak demand and excess capacity in the economy.

Fed Interest Rates by the Decade

Data in the following tables comes from the Federal Reserve Bank of St. Louis.

2021-Present: Massive Swings

The COVID-19 pandemic had a significant impact on early 2020s financial policies. At the onset of lockdown policies in early 2020, the economy shed millions of jobs and many service industry businesses closed. Consumers were unable to spend money dining out or at public entertainment venues, leading the Fed to cut rates in anticipation of a massive dip in consumption and employment.

The cliff dive in consumption never materialized. By 2021, it became clear that consumption had shifted into other areas, and as services opened back up with precautions, the economy recovered more quickly than anticipated. This was in part due to stimulus checks and other fiscal policies, such as an increased child tax credit.

Inflationary Pressure

Fiscal stimulus combined with supply-chain issues created more demand for commodities than supply could keep up with, and this quickly drove inflationary pricing.

The Federal Reserve has a target range of about 2% inflation per year for healthy growth. In 2022, the Consumer Price Index (CPI), or the real cost of goods, began increasing at a much quicker rate. In response to this overheating, the Fed announced it would increase interest rates in small but frequent steps.

From 2022 to 2023, the Fed increased interest rates 11 times, bringing them from a historic low of 0.08% to the current 5.33%, the highest the rate has been in over 20 years.

Impact of Rate Changes

This monetary policy has been effective in slowing inflation with the rate dropping back down below 3% annually. Fed Chairman Jerome Powell has indicated that the era of increasing rates is over as the economy returns to target range growth and employment remains high.

2011–2020: Slow Growth, Low Interest

From 2011 to 2020, the Federal Reserve implemented a variety of monetary policy actions in response to the economic conditions and financial challenges following the Great Recession. It continued its program of quantitative easing (QE). QE involves purchasing large quantities of financial assets, typically government and mortgage-backed securities, to lower long-term interest rates and stimulate economic activity.

By indicating that short-term interest rates would remain at low levels for an extended period, the Fed aimed to support continued economic growth. The Federal Reserve maintained the federal funds rate at near-zero levels for much of this period.

Impact of Rate Changes

Beginning in 2015, the Fed began a gradual normalization of monetary policy by raising the federal funds rate. These hikes reflected the Fed’s assessment of a strengthening economy and its desire to prevent the emergence of inflationary pressures. However, amid concerns about global economic growth and trade tensions, the Fed paused its rate hike cycle in 2019 and began cutting interest rates again in response to slowing growth.

2001–2010: Double Bust

Following the dot-com crash of 2001, the Fed began to cut interest rates. The economy suffered further downturns after the terrorist attacks on the World Trade Center on September 11, 2001. Global trade slowed, and the Fed chairman of the time, Alan Greenspan, led the Fed in cutting rates from highs of over 6% in 2001 to lows approaching 1% in 2002.

Bank deregulation led to a housing market boom as banks enabled more individuals to buy homes with subprime mortgages.

Impact of Rate Changes

As the economy took off in response to interest rate slashes, the Fed did raise rates causing some borrowers to default. When the housing market bubble burst in 2007, it triggered a global financial crisis.

The Federal Reserve took extraordinary measures to stabilize financial markets and support economic activity. This included the following:

• Injecting liquidity into financial markets through open-market operations
• Providing emergency loans to financial institutions
• Implementing special lending facilities to address funding stress

In December 2008, the Fed lowered the federal funds rate to near-zero levels, where it remained until December 2015. In addition to lowering interest rates, the Federal Reserve implemented multiple rounds of QE during the period from 2008–2010.

1991–2000: Accommodative Monetary Policy

1991 saw the end of the Gulf War and heightened geopolitical tensions and uncertainties. The economy began to dip because of disruptions from the war and a spike in oil prices. In response, the Fed lowered interest rates to mitigate the adverse effects of the conflict on consumer and business confidence.

Throughout much of the early 1990s, the Federal Reserve maintained an accommodative monetary policy stance intended to support economic recovery. Its policy shifted in the mid-1990s when widespread internet adoption fueled the dot-com boom. The Fed closely monitored the economic developments spurred by the boom, including rising asset prices and speculative investment activity in technology stocks.

Impact of Rate Changes

As concerns grew about the potential for overheating and asset bubbles in the stock market, the Fed gradually raised interest rates. Its actions contributed to the eventual bursting of the dot-com bubble and the subsequent economic downturn of the early 2000s. Following the downturn, the Fed gradually transitioned to a neutral monetary stance.

1980–1990: Fighting Inflation

In the 1980s, the Federal Reserve pursued aggressive anti-inflationary monetary policies, The Fed significantly raised interest rates to combat inflation, pushing the federal funds rate to historically high levels, peaking near 20% in 1981. Fed Chairman Paul Volker’s policies were aimed at breaking the back of inflation, which had reached double-digit levels, by reducing the growth of the money supply and anchoring inflation expectations.

The Federal Reserve maintained a tight monetary policy stance throughout much of the early to mid-1980s. These actions precipitated a period of economic contraction, with the United States experiencing a recession in 1981–1982. However, the recession ultimately helped to curb inflation and lay the foundation for a period of economic expansion. As the economy began to recover from the recession, the Federal Reserve gradually eased its monetary policy stance and lowered interest rates.

Black Monday

By the late 1980s, the United States was experiencing a period of sustained economic expansion until October 19, 1987. The 1987 stock market crash, often referred to as “Black Monday” occurred, and without the safety measures in place today, a cascade of responses worsened the sudden shock.

The Fed jumped into action by providing liquidity to the financial markets by conducting open-market operations and lending to financial institutions. It communicated with other central banks and financial authorities, both domestically and internationally to coordinate their responses to the crisis. This coordination helped to reassure market participants and stabilize global financial markets.

Impact of Rate Changes

In the aftermath of the crash, the Federal Reserve demonstrated flexibility in its monetary policy stance. While the Fed remained vigilant against inflationary pressure, it also recognized the potential risks to economic stability posed by the stock market crash and the need for accommodative monetary policy measures.

The Bottom Line

The federal funds rate is a powerful tool in the hands of the Federal Reserve. The Fed has wielded this tool for over 50 years to keep the economy of the United States within a “Goldilocks zone,” neither too hot nor too cool.

The federal funds rate directly impacts short-term loans and indirectly affects long-term loans. The cost of borrowing money impacts all Americans because it also affects the rate of inflation and the ability of businesses to hire employees.