The Federal Open Market Committee raised the fed funds rate a quarter point to 1.5 percent on December 13, 2017. It had raised it to 1.25 percent on June 14, 2017. That's just two months after it raised it to 1.0 percent in March. It raised it to 0.75 percent on December 14, 2016. The Fed's first rate increase after the recession was on December 15, 2015, when it raised it to 0.5 percent.
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 has $4 trillion of debt on its books from QE. In October 2017, it began allowing the debt to decline.
The Fed's higher rates affect your savings, your purchases and your loans. Here are five things you can do right now to protect your finances.
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 fed 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.
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 it would act decisively to keep them functioning.
The fed funds rate is the most significant leading economic indicators 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.
The Fed lowered the rate by a half point, to 0.25 percent, on December 16, 2008. That was the 10th rate cut in a little over a year. Previous cuts include:
- Sep. 18, 2007: A 1/2 point cut to 4.75 percent.
- Oct. 31, 2007: A 1/4 point cut to 4.5 percent.
- Dec. 11, 2007: A 1/4 point cut to 4.25 percent.
- Jan. 22, 2008: A 3/4 point cut to 3.5 percent.
- Jan. 30, 2008: A 1/2 point cut to 3 percent.
- Mar. 18, 2008: A 3/4 point cut to 2.25 percent.
- Apr. 30, 2008: A 1/4 point cut to 2 percent.
- Oct. 8, 2008: A 1/2 point cut to 1.5 percent.
- Oct. 29, 2008: A 1/2 point cut to 1 percent.
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.
After the Fed bailed out Bear Stearns, it thought the crisis was over. In April 2008, the Libor rate 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 percent, but Libor was 4.3 percent. This was the financial crisis of 2008.
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 worlds' 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.
The first clue to the recession to come was in the housing market, when subprime mortgages started to default. During the real estate boom, mortgages were made to subprime borrowers with poor credit history. These mortgages were hidden in packages resold by banks in the secondary market. Hedge funds, banks, and other investors bought them, thinking they were solid investments because credit rating agencies like Standard & Poor's said so.
When borrowers defaulted, financial firms like Lehman Brothers went bankrupt. This caused a panic, since no one really knew how big the problem was.
11Operation Twist Didn't Help Housing
Operation Twist was a $400 billion program that was supposed to boost the housing market and economic growth. But did it? The Fed bought billions of mortgage-backed securities from banks. When these matured, the Fed bought more. That's good. But the second part of Operation Twist—the "twist"—was designed to keep long-term interest rates low. The Fed sold off the short-term Treasury bills it held, using the proceeds to buy long-term Treasury notes and bonds.
Unfortunately, the Fed didn't address the real problem with housing: massive foreclosures in the pipeline. It can't create demand, and no one wants to buy a house if they know it won't increase in value. For that reason, the Fed's Operation Twist was like pushing a string, and it didn't help housing.
Former Fed Chair Ben Bernanke said that the central bank's primary role is to control the public's expectation of inflation. This means that in a healthy economy, the Fed would rather have higher interest rates to stifle inflation. That makes the Fed's willingness to lower the fed funds rate so decisively all the more dramatic. Learn how inflation affects you and how the Fed manages it.
Current Federal Reserve Interest Rates
Today's Fed Funds Rate Is 1.5 Percent
The current federal funds rate is 1.5 percent. The Federal Reserve signaled it will raise rates to 2 percent in 2018, 2.5 percent in 2019 and 3 percent in 2020. The rate is critical in determining the U.S. economic outlook.
The 2008 recession caused the Fed to lower rates 0.25 percent. That’s effectively zero. They stayed there seven years until December 2015, when the Fed raised interest rates to 0.5 percent. The fed funds rate controls short-term interest rates. These include banks' prime rate, the Libor most adjustable-rate and interest-only loans, and credit card rates.