This article is about what are the periods in the history of fed fund rates. The federal funds rate is the interest rate that banks charge each other for overnight loans to meet their reserve requirements. The Federal Reserve, the central bank of the United States, influences this rate by setting a target range and conducting open market operations to keep the actual rate within that range.
What are the Periods in the History of Fed Fund Rates?
The history of the fed funds rate can be divided into four periods: the pre-Volcker era, the Volcker era, the Greenspan era and the post-crisis era.
The pre-Volcker era (1954-1979)
The Federal Reserve was established in 1913 to provide a more stable and flexible monetary system. However, it was not until 1954 that the Fed started to announce its target for the fed funds rate. Before that, the Fed used other tools, such as the discount rate and reserve requirements, to influence money supply and interest rates.
From 1954 to 1979. the Fed followed a Keynesian approach of using monetary policy to smooth out business cycles and promote full employment and price stability. The Fed adjusted the fed funds rate in response to changes in inflation, unemployment and economic growth. The fed funds rate fluctuated between 0.68% and 13.91% during this period, with an average of 5.46%.
The Volcker era (1979-1987)
In 1979. Paul Volcker became the chairman of the Federal Reserve. He faced a serious challenge of high inflation and low economic growth, known as stagflation. To combat inflation, Volcker adopted a monetarist strategy of targeting money supply growth rather than interest rates. He raised the fed funds rate dramatically, reaching a peak of 19.1% in June 1981.
Volcker's tight monetary policy succeeded in bringing down inflation from 13.3% in 1979 to 3.2% in 1983. but at the cost of a severe recession in 1981-1982. The unemployment rate rose to 10.8% in November 1982. the highest since the Great Depression.
Volcker gradually lowered the fed funds rate as inflation declined and the economy recovered. He also shifted back to targeting interest rates rather than money supply in 1982. The fed funds rate averaged 10.97% during his tenure.
The Greenspan era (1987-2006)
Alan Greenspan became the chairman of the Federal Reserve in 1987. He inherited a stable economy with low inflation and moderate growth. He continued Volcker's policy of targeting interest rates and maintaining price stability as the primary goal of monetary policy.
Greenspan faced several challenges during his tenure, such as the stock market crash of 1987. the savings and loan crisis of the late 1980s, the Gulf War of 1990-1991. the dot-com bubble of the late 1990s and the terrorist attacks of 2001. He responded to these shocks by adjusting the fed funds rate accordingly, either lowering it to stimulate the economy or raising it to prevent overheating.
Greenspan presided over a long period of economic expansion from 1991 to 2001. known as the Great Moderation. The fed funds rate averaged 5.15% during this period, with a low of 0.98% in June 2003 and a high of 8.25% in February 1995.
However, some critics argue that Greenspan kept interest rates too low for too long after the dot-com bust, fueling a housing bubble that burst in 2007-2008 and triggered the global financial crisis.
The post-crisis era (2006-present)
Ben Bernanke succeeded Greenspan as the chairman of the Federal Reserve in 2006. He faced the worst financial crisis since the Great Depression, which threatened to plunge the world into a deep recession or even a depression.
To prevent a collapse of the financial system and stimulate the economy, Bernanke lowered the fed funds rate to near zero (0-0.25%) in December 2008 and kept it there until December 2015. He also implemented unconventional monetary policies, such as quantitative easing (QE), forward guidance and operation twist, to provide additional liquidity and stimulus.
Bernanke was replaced by Janet Yellen in 2014 and Jerome Powell in 2018. They continued Bernanke's policies of keeping interest rates low and gradually unwinding QE until late 2018. when they started to raise interest rates again amid signs of economic recovery and rising inflation.
However, in 2019-2020. they reversed course and cut interest rates again in response to trade tensions, global slowdown and the coronavirus pandemic. The fed funds rate is currently at 0-0.25%, with no plans to raise it until at least 2023.
The fed funds rate has averaged 2.02% since 2006. with a low of 0.05% in May 2020 and a high of 2.42% in April 2019.
Bottom Line
In this article, we have discussed what are the periods in the history of fed fund rates. The current stance maintains historically low rates to support economic recovery amid ongoing challenges.
