Current Federal Reserve Interest Rates and Why They Change

Why the Fed Lowered Its Benchmark Rate to 2.25% in July 2019

The current federal funds rate was lowered to 2.25% when the Federal Open Market Committee met on July 31, 2019.  It wants to take no chances that the economy will deteriorate. This benchmark rate is an indicator of the economy's health.

The fed funds rate is critical in determining the U.S. economic outlook. It controls short-term interest rates. These include banks' prime rate, most adjustable-rate and interest-only loans, and credit card rates. 

The 2008 recession caused the Fed to lower its benchmark rate to 0.25%. That’s effectively zero. It stayed there seven years until December 2015, when the Fed raised interest rates to 0.5%.

Schedule of Fed Funds Rate Increases to 2.5%

Jerome Powell
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The FOMC raised the fed funds rate a quarter-point to 2.5% on December 19, 2018.

Prior to that, the Fed had raised rates to the following levels:

  • 0.5% on Dec. 15, 2015.
  • 0.75% on Dec. 14, 2016.
  • 1.0% on March 5, 2017.
  • 1.25% on June 14, 2017.
  • 1.5% on Dec. 13, 2017. 
  • 1.75% on March 21, 2018.
  • 2.0% on June 13, 2018.
  • 2.25% on September 26, 2018.

The Fed finished tapering off its quantitative easing program in 2013. That was a massive expansion of the Fed's open market operations tool. The Fed still had $4 trillion of debt in 2017 on its books from QE. In October 2017, it began allowing its holdings to gradually decline. The fell to $3.8 trillion by July 2019 when the Fed announced it would no longer reduce its holdings.


Five Steps That Protect You From Rising Interest Rates

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The Fed's higher rates affect your savings, your purchases and your loans. Learn about five things you can do right now to protect your finances.

How the Fed Changes the Fed Funds Rate

Jerome Powell
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The FOMC sets a target for the fed funds rate at its regular meeting. Banks charge each other this rate when they lend each other funds. Those are loans banks make to each other to meet the Fed's reserve requirement. Technically, the banks set these rates, not the Federal Reserve. But banks usually follow whatever rate the Fed sets as its target. 

How the Fed Funds Rate Works

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The FOMC targets a specific level for the fed funds rate. This rate directly influences other short-term interest rates such as deposits, bank loans, credit card interest rates, and adjustable-rate mortgages. By lowering the fed funds rate so dramatically during​ the 2008 financial crisis, the Fed kept funds available for banks. It signaled to financial markets that the Fed would act decisively to keep banks functioning.

How Other Interest Rates Are Determined

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The fed funds rate is the most significant leading economic indicator in the world. Its importance is psychological as well as financial. In fact, the only two rates it directly impacts are the prime lending rate and adjustable rate mortgages. The yield on the 10-year Treasury note determines conventional mortgage rates. Find out how the two work in controlling recession and inflation.

Historical Fed Funds Rate in 2007 and 2008

Ben Bernanke
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The Fed lowered the rate by a half-point, to 0.25%, on December 16, 2008. That was the 10th rate cut in a little over a year. Previous cuts included:

  • Sep. 18, 2007: A 1/2 point cut to 4.75%.
  • Oct. 31, 2007: A 1/4 point cut to 4.5%.
  • Dec. 11, 2007: A 1/4 point cut to 4.25%.
  • Jan. 22, 2008: A 3/4 point cut to 3.5%.
  • Jan. 30, 2008: A 1/2 point cut to 3%.
  • March 18, 2008: A 3/4 point cut to 2.25%.
  • April 30, 2008: A 1/4 point cut to 2%.
  • Oct. 8, 2008: A 1/2 point cut to 1.5%.
  • Oct. 29, 2008: A 1/2 point cut to 1%.

The Fed's aggressive expansionary monetary policy was needed to address the 2008 financial crisis.

How the Fed Intervened Throughout the Financial Crisis

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In August 2007, banks became fearful of loaning each other funds, causing the Libor rate to rise. The Fed initially tried to calm this panic by adding funds to the discount window, hoping that this would restore liquidity and confidence in financial markets. When that didn't work, the Fed realized it needed to lower the fed funds rate. By 2008, the Fed bailed out Bear Stearns, bought AIG, and made nearly unlimited funds available to banks to prevent global financial market collapse.

Historical LIBOR Rates

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After the Fed bailed out Bear Stearns, it thought the crisis was over. In April 2008, the Libor started to diverge from the fed funds rate. The Fed lowered the fed funds rate, but Libor continued to rise. Despite the Fed's reassurance, banks continued to panic, and were unwilling to lend to each other. They were afraid of receiving subprime mortgages as collateral. By October 2008, the fed funds rate was 1.5%, but Libor was 4.3%.

Low Interest Rates Create Asset Bubbles Instead of Inflation

Gold Dollar
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Many people worried that the Fed's stimulus programs would create inflation. But it didn't, because the Fed wound down most of the programs that steered the world's largest economy away from collapse. It also outlined a plan to absorb money the Fed has pumped into banks since August 2007. Instead, the Fed's policies created asset bubbles in commodities not measured in the Consumer Price Index. Those include bonds, gold, stocks, and the dollar.