Popular Posts

Fed Funds Rate History: Current and Past Rates and Future Predictions


Written by Lauren Perez | Published on February 28, 2020

 

The history of the fed funds rate has plenty of ups and downs, although today fed funds is not far from the all-time low of 0% (which was seen from 2009 to 2015). But it hasn’t always been that way: back in 1980 and 1981, fed funds reached its all-time high of 20%.

The federal funds rate is the main monetary policy tool of the Federal Reserve. Sometimes referred to as fed funds, this key instrument is controlled by the Federal Open Market Committee (FOMC), and influences everything from the cost of your mortgage to the APR you pay on credit cards.

Let’s review fed rate history from 1971 to the present, exploring the reasons the FOMC drove it to its highs and lows.

In this article we will cover:

Fed funds rate high: 20% in 1980 and 1981

The federal funds rate touched its all-time high of 20% at the end of 1980 and again in the first half of 1981, when it fluctuated between 18% and 20%.

The fed funds rate was so high in 1980 and 1981 as a response to unusually high inflation that had been on the rise since the 1970s. From 1977 to 1979, inflation more than doubled, spiking from 6.70% to 13.29%, dropping only slightly to 12.52% in 1980. The FOMC chose to increase interest rates to combat inflation by making it more expensive to borrow money.

The FOMC found itself in a complicated position in 1981, faced with not only high inflation, but rising unemployment as well, which would usually signal the FOMC to cut interest rates.

Unfortunately, the FOMC could not support both ends, and the economy soon fell into a recession lasting from July 1981 to November 1982. As a result, the fed funds rate fell from its historic high. 

Fed funds rate low: 0% to 0.25% in 2009-2015

The federal funds rate reached its all-time low of 0% (the lower limit of a 0% to 0.25% range) in 2009, where it stayed until 2015, as the economy struggled to get back on its feet after the housing crisis and recession that lasted from 2007 to 2009. The whole era from 2009 to 2015 was marked by rock-bottom rates. 

The FOMC cuts the fed funds rate during a recession in an attempt to make money cheaper to borrow, which would allow consumers to buy more, pumping money back into the economy. 

Fed funds rate: A bit of history

The federal funds rate saw big changes in the 1970s, where we start our story. We’ll outline the highs and lows of the federal funds rate in each decade from then to the present.

Why begin in the 1970s? In 1971, President Richard Nixon took the U.S. Dollar off the gold standard. Under the Bretton Woods system, which was established in 1944 as an international currency trading system between the leading global economic powers, currencies were tied to the U.S. Dollar, which in turn was backed by gold at a fixed rate. Other nations bought and sold U.S. Dollars to keep their currencies stable. 

By 1971, the U.S. simply didn’t have enough gold bullion to sustain the system, so Nixon cut the ties between the dollar and gold in an attempt to stabilize the dollar, and his move ended the Bretton Woods system. This decision, known as the Nixon Shock, moved monetary policy away from a fixed-rate system into the floating exchange rate system we live under today. 

Fed funds in the 1970s and 1980s

The beginning of the 1970s is marked by the collapse of Bretton Woods and its effects. But by the end of the decade, rates were reaching higher and higher, as was inflation. 

To combat rising inflation — one of the Fed’s dual mandates is to keep inflation steady — the FOMC switched to using nonborrowed reserves as its operating target in 1979. At that point, inflation stood at 13.29%, dropping somewhat to 12.52% in 1980 after the change. Back in these days, the FOMC didn’t announce their target rate after meetings as they do today. Instead, the Fed adjusted rates via open market operations, and markets had to guess what their target rate was.

Unfortunately, with high inflation running rampant, the FOMC could only do so much with the federal funds rate, resulting in the historically high level of 20% seen in the early 1980s. 

In 1982, the Committee made another change, switching to borrowed reserves. After that, the federal funds rate declined gradually, ending the decade at around 8%. Inflation also fell to 8.92% by 1989, and hasn’t moved above 10% since then.

Fed funds in the 1990s and 2000s

The 1990s began with a recession right out of the gate, although it lasted only eight months — from July 1990 to February 1991. The FOMC reduced fed funds through 1993 as it fought the recession. 

When rates did finally turned around and started rising again in 1994, the FOMC implemented another change to its protocol: immediate public announcements of any policy rate changes. Before, market participants had to guess where the Fed had pegged rates, while this change brought a new level of transparency to Fed policy. Consequently, fed funds remained pretty steady through the balance of the 1990s. 

The aughts are known for their tumult. The the dot-com market crash, the terrorist attacks of 9/11 and a brief recession drove rates lower in the first half of the decade. The economy recovered and rates popped higher by 2007 — only to crash again during the Great Recession. The fed funds rate tumbled from 4.50% in December 2007 to 0% by late 2008. 

In the midst of the worst economic crisis since the Great Depression, the FOMC switched up their protocol once again, deciding in December 2008 to set a target range for federal funds, instead of a single rate. Since this is when the fed funds rate was at its lowest, we’re really looking at the lowest range in this instance. The lower limit of this band at the time was 0% and the upper limit was 0.25%.

Fed funds since the Great Recession

The federal funds rate has perked up a bit since the Great Recession, but hasn’t come close to reaching the pre-recession high of 5.25%. Things started to look up again in December 2015, when the Fed hiked rates for the first time since 2006. The 2015 raise began a series of nine hikes, lasting until December 2018, when fed funds peaked at 2.50%.

Rates paused there for a few months before the Fed cut rates in July 2019, which was notable as it was the first cut in over a decade. Two more cuts followed, and the new decade started with a policy pause. 

The fed funds rate future

In early 2020, the federal funds rate range was at 1.50% to 1.75%. It’s expected to remain there for at least the first half of the year, barring any significant developments that could affect the economy. We cover both the Fed meeting and predictions on where interest rates may go next.

Fed officials justified the three rate cuts in the second half of 2019 as protection against downside risks like weaker global growth, trade uncertainties and flagging manufacturing industries. These risks remain in 2020, with the added threat of coronavirus, which has already prompted travel restrictions and the closing of stores and factories throughout Asia.

The Fed’s most recent Summary of Economic Projections (SEP), from December 2019, indicated no expected changes to the fed funds rate in 2020. A projected fed funds rate midpoint for 2021, however, is 1.9% which hints at a potential rate hike in 2021.

If you're worried about Fed interest rate hikes, online savings accounts offer a variable rate solution that usually adjusts with market rates. This gives you more flexibility than CDs, in the event the Fed raises rates.

However, if you're more worried about the Fed lowering interest rates, it may be worth opening a long-term CD to lock in rates now.

Comments

The financial institution, product, and APY (Annual Percentage Yield) data displayed on this website is gathered from various sources and may not reflect all of the offers available in your region. Although we strive to provide the most accurate data possible, we cannot guarantee its accuracy. The content displayed is for general information purposes only; always verify account details and availability with the financial institution before opening an account. Contact [email protected] to report inaccurate info or to request offers be included in this website. We are not affiliated with the financial institutions included in this website.