Fed's Interest Rate History: The Fed Funds Rate Since 1981

• The US Fed has a dual mandate of promoting price stability and maximum employment.
• The Federal interest rate decisions largely depend on the US Fed’s balancing act.
• Rate cuts can stimulate economic growth. On the other hand, the economy slows down during rate hikes.
• The US Fed cut the interest rate in September 2024 by 50 basis points. This lowered the range of Federal Reserve interest rates to 4.75-5%.

The Federal Reserve signalled a change in its monetary policy when it cut the Federal Reserve interest rates in September 2024. Lowering the interest range to 4.75-5%, the Federal Reserve reduced the interest rate by 50 basis points.Rate changes are mentioned in basis points which equals 1/100 of a percentage point. Thus 50 basis points means 0.50 percentage points. Let's learn more about the history of such rate cuts and what they signify.

The Federal interest rate is the rate at which banks borrow and lend money to each other overnight, largely to meet the requirements of the US Federal Reserve (US Fed).Changes to the Federal interest rate influence the money supply. The impact starts with banks and eventually passes down to consumers. The Federal Open Market Committee (FOMC) makes these changes to align with the US Fed’s goals of achieving price stability or low inflation and sustainable economic growth.

Lower interest rates can stimulate economic growth through increased consumer spending. It normally brings down the cost of goods and services. Also, loans normally become less expensive as consumers pay less owning to lower loan rates.On the other hand, the opposite is true during a Fed interest rate hike i.e. the cost of goods and services is generally higher, and consumers typically pay more due to higher interests on loans. As a result, consumers feel discouraged to spend and the economy slows down.

Inflation and unemployment are the key economic metrics, both of which have traditionally been inversely related. When one rises, the other goes down, and vice versa.The US Fed has a dual mandate of promoting price stability and maximum employment. The Federal interest rate decisions largely depend on how the US Fed interprets and balances this dual mandate.

Going back to 1981, there have been significant events that influenced the Federal Reserve Interest Rates decade after decade. The Federal interest rate recorded several highs and lows since then.From battling high inflation levels to recovering from the aftereffects of the coronavirus pandemic, here are some of the key events of each decade.

Key Events from 1981 to 1990

The 1980s witnessed high inflation and consumer borrowing was expensive. The interest rates in these 10 years would often rise, fall, and then rise again. Eventually, the inflation went down but unemployment increased.

Key Events from 1991 to 2000

Among other policies, this era was marked by ‘insurance’ cuts i.e. interest rate cuts to give the economy an extra boost, and not fight recession.However, some later blamed the policies during this period for fuelling asset bubbles. They believe it led to the dot-com boom and bust and the housing bubble that sparked the financial crisis in 2008.

Key Events from 2001 to 2010

The Fed faced challenges from the dot-com bust, the 9/11 terrorist attacks, the 2008 financial crisis, and the Great Recession. There were clear cycles of rate cuts and hikes during this period.

Key Events from 2011 to 2020

While the economy recovered from the Great Recession, new challenges came to light due to the coronavirus pandemic. The pandemic sent shock waves across economies and triggered a global crisis. It ushered back in another era of near-zero rates in the US.

Key Events From 2021 to Present

Inflation emerged as a key economic threat due to the coronavirus pandemic. After giving the economy time to recover, the US Fed increased the interest rates.After a series of hikes, the US Fed reduced the interest rate by 50 basis points in its last meeting held in September 2024. The current Fed interest rate range is 4.75-5%.

The Federal interest rate is a powerful monetary tool for stabilising the economy. Changing rates influence the money flow and borrowing costs, which impacts inflation and the ability of businesses to hire, affecting the consumers in turn. Overall, understanding the history of the Fed interest rates can help different sectors prepare accordingly.