Fed Funds Rate History with Its Highs, Lows and Chart

The Federal Reserve prefers to keep the fed funds rate between 2 and 5 percent. It's the sweet spot that maintains a healthy economy. That's where the nation's gross domestic product grows between 2 percent and 3 percent annually. It has a natural unemployment rate between 4.5 percent and 5.0 percent​. Price increases remain below the Fed's inflation target of a 2 percent core inflation rate. The current fed funds rate is 2.25 percent.

But there were times in history where the nation's benchmark interest rate was well above its sweet spot. That was to curb runaway inflation. Since 2008, it's been well below to stimulate economic growth. Once you see how the Fed changed the fed funds rate, you will understand how it manages inflation and recession.

Highest Fed Funds Rate

The fed funds rate reached a high of 20 points in 1979 and 1980. That was to combat double-digit inflation. 

In 1973, inflation tripled, from 3.9 percent to 9.6 percent. The Fed only doubled interest rates from 5.75 to a high of 11 points. Inflation continued to remain in the double-digits through all of 1974, lasting until April 1975. The Fed kept raising the fed funds rate to a peak of 13 in July 1974, and then dramatically lowered the rate, reaching 7.5 by January 1975.

These sudden changes, known as stop-go monetary policy, confused businesses. They kept prices high to stay ahead of the Fed's interest rate spikes.

That only made inflation worse. 

Fed leaders learned that managing inflation expectations was a critical factor in controlling inflation itself.

Lowest Fed Funds Rate

The all-time low was 0.25 percent. That's effectively zero. The Fed lowered it to this level on December 17, 2008, the 10th rate cut in a little over a year.

It didn't raise rates until December 2015. 

Before this, the lowest fed funds rate was 1.0 percent in 2003, to combat the 2001 recession. At the time, there were fears that the economy was drifting towards deflation.

Fed Funds Rate History

This chart shows the fed funds rate changes since 1971. Its complete history from 1954 to the present is found at the Federal Reserve Bank of St. Louis.

(Sources: New York Fed. "A History of Fed Leaders and Interest Rates," The New York Times, December 16, 2015.)