Federal Funds Rate History: 1980 Through The Present

The Federal Reserve just cut interest rates, but that doesn’t mean we’re on the brink of seeing the ultra-low interest rates that consumers have become accustomed to after the 2008 financial crisis.

The Federal Open Market Committee (FOMC) decided to cut interest rates by half a percentage point for the first time since the early days of the coronavirus pandemic. The move means that the federal funds rate, the Fed’s ultimate borrowing benchmark, is no longer at its highest level in 23 years. Still, the federal funds rate remains in its target range of 4.75% to 5%. The percentage would only return borrowing costs to levels last seen in 2023. Prior to that, interest rates hadn’t reached their current levels in over a decade. The ultimate question next is how far the Fed can cut interest rates, and whether its moves will be enough to prevent a further slowdown in the economy.

When it comes to the world’s most powerful central bank, history is often a guide. For example, history has shown that the Fed’s goal of giving the U.S. economy a “soft landing” — that is, taming inflation without harming the job market or the economy — has been difficult and hard to achieve. Throughout the history of the Fed’s rate hikes, officials have rarely been able to slow the economy without causing a recession. Outside of major economic collapses, policymakers have also tended to gradually lower interest rates, according to Bankrate’s analysis.

To help consumers understand the historical significance of the Fed’s rapid rate hikes in the post-pandemic era, Bankrate has compiled a guide to the Fed’s past rate hikes from 1981 to present. While interest rates may seem historically high right now, our analysis shows that we’re not far off the historical average right now. Prior to the Great Recession, the market-driven “effective” federal funds rate averaged 6.38%.

Interest rate changes are expressed in “basis points”, which are equal to 1/100th of a percentage point. For example, a 75 basis point increase is 0.75 percentage points.

Fed interest rate history from 1981 to 1990: Volcker fights “Great Inflation” with historic interest rate swings and aggressive hawkish monetary policy

The federal funds rate has never been higher than it was in the 1980s.

The main reason was that the Fed wanted to combat inflation, which had soared to a record high of 14.6% in 1980.

As a result, the US central bank did something that seems counterintuitive for an institution trying to maintain the most productive economy possible: it engineered a recession to drive prices down again.

The federal funds rate began the decade with a target level of 14 percent in January 1980. By the end of the December 5, 1980, conference call, officials had raised the target range by 2 percentage points to a record high of 19 to 20 percent.

As a result, borrowing costs for consumers have soared: The average interest rate on a 30-year fixed-rate mortgage has risen to nearly 20%, the highest on record in this era, according to historical data from Bankrate.

Key insights from 1981 to 1990

But since then, the Fed has changed almost as much as it has with interest rates: instead of moving rates slowly and gradually in one direction (up or down), interest rates have often risen, then fallen, then risen again.

Records show that interest rates plummeted to a target range of 13-14% on November 2, 1981, then rose to 15% in the first four months of 1982, before falling again to 11.5-12% on July 20, 1982. The “effective” federal funds rate averaged 9.97% during this decade. Rates have not exceeded 10% since November 1984.

One reason for the change is that Chairman Paul Volcker decided that the best way to fight inflation was to limit the growth of the money supply rather than directly targeting interest rates, which is how authorities currently control inflation.

Other differences between the current Fed and past Feds include a broader target range for the federal funds rate, sometimes as much as 5 percentage points rather than the current 0.25 percentage points. Not to mention, the Fed often adjusts interest rates at unscheduled meetings and does not issue policy statements afterwards.

Chairman Paul Volcker was the primary driver of Fed policy during the decade and led the central bank until Alan Greenspan took over as chairman in August 1987.

Critics at the time accused Volcker of harming the economy: Farmers, for example, marched on tractors to the Fed’s headquarters in Washington, D.C., to protest rising interest rates, and car dealers mailed Volcker the keys to their unsold cars in a coffin, according to a St. Louis Fed historian.

These moves came at a cost: The unemployment rate rose to nearly 11%, then the highest since the Great Depression, according to historical data from the Bureau of Labor Statistics, but inflation did not pick up for years, falling below 2% by 1986.

Fed interest rates from 1991 to 2000: Alan Greenspan led the Fed through a short recession and then into a “Great Moderation” with a long economic expansion.

Federal Reserve Interest Rate Movements

After years of massive inflation that roiled the Fed, Mr. Greenspan has had much calmer times, though his nearly 18 years at the helm of the Fed have not been without its fair share of challenges.

After an eight-month recession that began in August 1990, Greenspan and his associates managed to raise the federal funds rate to its highest level of that period, a target level of 6.5%, in May 2000. The rate hit a low of 3% in September 1992, the lowest in a decade.

Also, in the early 1990s, the Fed adjusted interest rates primarily at Federal Open Market Committee (FOMC) meetings, which is consistent with how the Fed operates today: officials raised interest rates in an emergency meeting on April 19, 1994, due to inflation concerns, and lowered borrowing costs in an unscheduled meeting on October 15, 1998.

Key insights from 1991 to 2000

Another notable feat was the first time the U.S. central bank implemented an “insurance” rate cut — meaning officials lowered interest rates not to fight a recession but to further stimulate the economy. This was the case in 1995, 1996 and 1998 when the financial system faced a variety of headwinds, from Russia’s default to the collapse of major hedge funds.

The longest-serving Fed chairman ever, Greenspan is often referred to as “the great master” for guiding the economy through the longest economic expansion of its time. Earlier this decade, the Fed began informally targeting inflation at 2%, a pivotal decision that would decisively change modern monetary policy.

But as an advocate of deregulation, his policies were later blamed for fueling the asset bubbles that led to the dot-com bubble and its collapse, and the housing bubble that led to the 2008 financial crisis.

Fed interest rates from 2001 to 2010: The Fed faced the dot-com bubble burst, the 9/11 terrorist attacks, and the 2008 financial crisis.

2001-2003 interest rate cuts

2004-2006 interest rate hikes

2007-2008 interest rate cuts

The 2000s was the Fed’s most rhythmic period, as it went through distinct cycles of both tightening and easing interest rates.

At the start of the decade, the Fed cut interest rates 13 times to a low of 1% after the tech stock bubble burst, triggering a recession exacerbated by the 9/11 terrorist attacks, a level that may have seemed unthinkable to those who remember interest rates in the ’80s.

Key insights from 2001 to 2010

The US central bank then raised interest rates 17 times between 2004 and 2006, each time by a quarter of a percentage point, to a maximum of 5.25%.

But the 2008 financial crisis and subsequent Great Recession slammed the economy into a tailspin, and the Fed then did the unthinkable: it cut interest rates by 100 basis points to near zero, leading the Fed through one of the most aggressive economic rescues in the bank’s history.

During this period, the Fed also unveiled an experimental and unconventional monetary policy tool: quantitative easing, formally known as large-scale asset purchases (LSAPs). This massive bond-buying program to lower long-term interest rates and further stimulate the economy saw the Fed’s balance sheet balloon from an initial $870 billion to $4.5 trillion.

Fed interest rates 2011-2020: Economy recovers from Great Recession and faces coronavirus pandemic a decade later

2015-2018 interest rate hikes

2019-2020 interest rate cuts

The Fed was unable to escape zero interest rates in the 2010s, just as it was unable to escape a devastating recession.

In the end, officials kept rates at rock bottom until 2015, then only raised rates by 25 basis points per year after that, meaning the Fed raised rates three times in 2017 and four more times in 2018. The federal funds rate peaked at 2.25% to 2.5%.

Faced with sluggish inflation and slowing growth, the Fed decided to cut interest rates three times in 2019 to inject fresh stimulus into the economy, similar to Chairman Greenspan’s “insurance” cuts in the 1990s.

Key insights from 2011 to 2020

The federal funds rate looked set to settle there until the coronavirus pandemic hit, ushering in another era of zero interest rates. With the economy grinding to a halt, the Fed held two emergency meetings within 13 days and slashed interest rates to zero.

Janet Yellen took over the helm of the Fed from Bernanke in February 2014 and led the economy through the recovery from the Great Recession before being succeeded by Jerome Powell in February 2018.

Fed Rates 2021 to Present: The Fed’s Latest Moves in an Era of High Inflation

Interest rate hikes from 2022 to July 2023

Rate cuts by 2024?

In the aftermath of the coronavirus crisis, inflation has once again become the biggest economic threat, forcing the Fed to look back at interest rate setting.

In March 2022, the Fed raised interest rates by a quarter of a percentage point for the first time since 2018, leaving them near zero for two years to give the economy time to recover from the COVID-19 pandemic. The Fed continued to make groundbreaking moves in the years that followed: At its May meeting, it raised rates by a half-point, authorizing the largest rate hike since 2000, and in June it raised rates by a quarter of a percentage point, authorizing the largest rate hike since 1994. The Fed followed up this historic move with three more rate hikes of the same size.

Even as inflation soared to its highest level in 40 years, officials felt comfortable keeping their foot on the gas, in part based on the mistaken assumption that any significant price pressures would be temporary.

Experts say U.S. central bankers are often worried about the wrong conflict. The Fed was probably afraid of inflation being too low in the early 2020s just as officials were worried about inflation in the 1990s, says Scott Sumner, chair emeritus of monetary policy at George Mason University’s Marketas Center.

“Central banks tend to be focused on fighting old wars,” Sumner says. “When inflation is high, they take a more hawkish stance. When inflation is below target, the Fed thinks, ‘Maybe we should have been more expansionary.’ Powell came into the job determined to get more aggressive if there was another recession. My own view is that this strategy was relatively successful initially, but overdone.”

Key insights for the 2021-2022 era

But by many standards, the U.S. central bank is a very different actor at the helm, he added, meaning officials are not trying to tame inflation with aggressive and erratic interest rate hikes as in the 1980s, though they also disagree on the staccato approach to interest rate hikes that led to the great inflation of the 1980s.

“The success of the Volcker disinflationary policies of the early 1980s came after multiple failed attempts to lower inflation over the previous 15 years,” Powell said in a key speech for 2022 at the Fed’s annual monetary policy symposium in Jackson Hole, Wyo. “Our goal is to avoid that outcome by acting decisively now.”

The Federal Reserve has made great progress in its efforts to bring inflation closer to its 2% target: According to the Bureau of Labor Statistics’ Consumer Price Index (CPI), prices rose 3% year-over-year in June, three times faster than the eye-popping 9.1% annual rate expected in June 2022. So-called core inflation, which excludes volatile food and energy items, rose 3.3% year-over-year, according to the BLS data.

At the same time, the unemployment rate has soared and job growth has slowed significantly since the start of the year. Government officials have signaled that they no longer want to slam the brakes on economic growth as hard as they have over the past year for fear of hurting the job market too much.

Conclusion

Even if the Federal Reserve cuts interest rates, borrowing costs will likely remain higher than they were during the pandemic, at least for now. Focusing on eliminating high-interest debt, improving your credit score, and shopping around for the best places to park your cash will pay off.

“Interest rates took the elevator up when they went up but they’ll take the stairs down when they go down,” McBride said. “Interest rates just won’t come down fast enough to get us out of a tough spot.”