The Federal Open Market Committee (FOMC) decided at its scheduled meeting held on October 29 to lower the target rate for federal funds to 1% from 1½% set at its unscheduled meeting of October 8, 2008. In making its decision to reduce the target, the FOMC stressed the following factors: (1) the pace of economic growth appears to have slowed markedly owing importantly to a softening of consumer spending; (2) business equipment spending and industrial production have weakened; (3) economic slowdowns abroad have dampened the prospects for U.S. exports; (4) intensified strains in financial markets are also likely to further reduce spending; and (5) inflation prospects have improved due to declines in energy and other commodity prices. The next schedule meeting of the FOMC is set for December 11, 2008

Labonte, Marc

Makinen, Gail E.

UNT Digital Library

Order Code 98-856 EUpdated October 29, 2008Federal Reserve Interest Rate Changes:  2001-2008Marc Labonte and Gail E. Makinen Government and Finance DivisionSummaryThe Federal Open Market Committee (FOMC) decided at its scheduled meetingheld on October 29 to lower the target rate for federal funds to 1% from 1½% set at itsunscheduled meeting of October 8, 2008.  In making its decision to reduce the target,the FOMC stressed the following factors: (1) the pace of economic growth appears tohave slowed markedly owing importantly to a softening of consumer spending; (2)business equipment spending and industrial production have weakened; (3) economicslowdowns abroad have dampened the prospects for U.S. exports; (4) intensified strainsin financial markets are also likely to further reduce spending; and (5) inflation prospectshave improved due to declines in energy and other commodity prices.  Because of theinternational scope of the financial turmoil, the downside risks to growth remain.Nevertheless, the FOMC believes that the substantial easing of monetary policy to date,combined with other measures to provide liquidity to the financial system, should helpto promote moderate growth over time.  The Board of Governors also reduced thediscount rate for primary credit to 1¼% from 1¾%. The next scheduled meeting of theFOMC is set for December 11, 2008.  This report will be updated as events warrant.Rates ChangesThe Fed directly changes two interest rates.  The first, called the discount rate, is anadministered rate explicitly set by the Fed.  It is the rate at which the Fed lends short-termfunds to banks, pursuant to P.L. 96-221, the Monetary Control Act of 1980.  It isdetermined by the seven-person Board of Governors of the Federal Reserve System.  Thesecond, known as the federal funds rate, is a market rate at which banks lend to each otherovernight to meet their “reserve requirements” and other liquidity needs.  The Fed sets atarget for this rate and buys and sells U.S. Treasury securities with an aim to achievingthe target, which speedily becomes known to market participants.  It is decided by a 12-person Federal Open Market Committee, which includes each member of the board plusa varying five-person roster selected from among the 12 regional Federal Reserve Bankpresidents (among the 12, the New York bank is always represented on the FOMC).CRS-2On January 6, 2003, the Board of Governors announced a fundamental change to thesetting of the discount rate.  Henceforth, it was to be made a penalty rate for those bankswho chose to borrow from the Federal Reserve to meet temporary reserve deficiencies asopposed to borrowing in the federal funds market.  A primary discount rate of 2¼% wasset for banks judged to be in a sound financial condition, whereas banks whose financialcondition was judged to be riskier would be required to pay a higher secondary rate of2¾%.  This change in operating procedure is shown in Table 1.  Understanding the AnnouncementsBecause the discount rate is administered, changes in it are stated explicitly.  Hence,the changes shown in Table 1 are exact.  Because the federal funds rate varies somewhatin response to market conditions, when the Fed changes only the federal funds rate, it mayspecify the target rate, or it may only announce that it is “increasing [or decreasing]slightly the degree in pressure on reserve positions” and that the action is “expected to beassociated with a small increase [or decrease] in short-term money market interest rates.”In the latter case, the size of the rate change must be inferred.  Hence, some of the federalfunds rates in the table are approximate, based on observation instead of announcements.Rationale for ChangesThe Fed tries to keep the economy operating at an output level consistent with a lowrate of inflation and low unemployment.  It therefore seeks a level of interest rates atwhich the economy will grow at its potential to produce.  The interest rate levels thatproduce this growth rate vary with the course of the business cycle.  Different rates arejudged appropriate at different times. Changes in interest rates are the most visible signsof the Fed’s monetary policy, immediately affecting financial institutions and markets ofall kinds here and abroad. Unusual financial market conditions such as those related to theAsian financial crisis of 1997-1998, the Russian debt crisis of 1998 and the terroristattacks of September 2001 also influence Fed decisions on rate changes.  The Fed reportsto Congress twice yearly on its monetary policy including rate changes, in oversighthearings in February and July as originally required by P.L. 95-188, the Federal ReserveReform Act.Monetary policy has varied considerably over the current economic expansion thatbegan early in 2001.  Initially, it was aimed at setting the expansion in motion.  To dothis, the federal funds target was reduced from 5½% in March 2001 to 1% in June 2003.It remained at 1% for a year.  As the expansion gathered momentum, the target wasraised in 17 equal increments spread over two years to 5¼%.  Even as the FOMC drewattention to upward movements in the core rate of inflation at various meeting during2006 and 2007, it continued to express the view that it would moderate over time aswould the rate of growth of GDP.  These reasons appear to be important for leaving therate unchanged at 5¼% for more than a year.  However, during the late summer of 2007,the fall in housing prices and conditions in financial markets related to the difficulty inrefinancing sub-prime mortgages became a matter of concern. To ease these conditions,the Board of Governors on August 17, 2007, reduced the discount rate for primary creditto 5¾%.  This was followed on September 18 with another reduction of ½% and areduction in the federal funds target to 4¾%.  Additional cuts of ¼% in both rates wereCRS-3approved on October 31 and December 11, 2007.  On January 22 the target was reducedby ¾% and on January 30 by a further ½%.The economy began to soften in the third quarter of 2007 (GDP growth wasnegative, falling at an annual rate of -0.2%).  In the first quarter of 2008 it was positiveagain, and rose at an annual rate of 0.9%.  During the second quarter, the growth was alsopositive and at an annualized rate of 2.8%.  The unemployment rate began to rise on asustained basis in February and in August it reached 6.1% (it remained at this rate inSeptember).  Job losses since December 2007 are in excess of 700,000.  As conditionsin financial markets worsened and the economy softened, the FOMC and the Boardapproved further reduction in the federal funds target and discount rate.  Both rates werelowered on March 18, April 30, October 8, and October 29 and the discount rate wasreduced itself on March 16.  They now stand at 1% and 1¼%, respectively.  As thesedevelopments were taking place, the world price of energy began to rise at a brisk rate.Rising energy prices threatened to boost the overall rate of inflation posing a challengeto the Fed’s mandated commitment to stable prices.  Initially, the Fed reacted by holdingthe federal funds target steady.  However, as the magnitude and international scope of thecredit crisis became apparent and energy and other commodity prices began to fall, thetarget was lowered and the Fed undertook a number of new and innovative measures toshore up the financial system. These measures were also undertaken to shore up theeconomy in general as growth slowed and job losses mounted.  For further discussion, see CRS Report RL30354, Monetary Policy and the FederalReserve: Current Policy and Conditions, by Marc Labonte and Gail Makinen.CRS-4Table 1.  Recent Interest Rate ChangesDateFederal Funds Rate Target Discount RateBefore Change After Before Change AfterApr. 18, 2001 5 -½ 4½ 4½ -½ 4May 15, 2001 4½ -½ 4 4 -½ 3½June 27, 2001 4 -¼ 3¾ 3½ -¼ 3¼Aug. 21, 2001 3¾ -¼ 3½ 3¼ -¼ 3Sept. 17, 2001 3½ -½ 3 3 -½ 2½Oct. 2, 2001 3 -½ 2½ 2½ -½ 2Nov. 6, 2001 2½ -½ 2 2 -½ 1½Dec. 11, 2001 2 -¼ 1¾ 1½ -¼ 1¼Nov. 6, 2002 1¾ -½ 1¼ 1¼ -½ ¾Jan. 6, 2003  —  —  — 2¼a  —  — June 25, 2003 1¼ -¼ 1 2¼ -¼ 2June 30, 2004 1 +¼  1 ¼ 2 +¼ 2¼Aug. 10, 2004 1¼ +¼ 1 ½ 2¼ +¼ 2½Sept. 21, 2004 1½ +¼ 1 ¾ 2½ +¼ 2¾Nov. 10, 2004 1¾ +¼ 2 2¾ +¼ 3Dec. 14, 2004 2 +¼  2¼ 3 +¼ 3¼Feb. 2, 2005  2¼ +¼ 2½ 3¼ +¼ 3½Mar.  22, 2005 2½ +¼ 2¾ 3½ +¼ 3¾May 3, 2005 2¾ +¼ 3 3¾ +¼ 4June 30, 2005 3 +¼ 3¼ 4 +¼ 4Aug. 9, 2005 3¼ +¼ 3½ 4¼ +¼ 4½Sept. 20, 2005 3½ +¼ 3¾ 4½ +¼ 4¾Nov. 1, 2005 3¾ +¼ 4 4¾ +¼ 5Dec. 11, 2005 4 +¼ 4¼ 5 +¼ 5¼Jan. 31, 2006 4¼ +¼ 4½ 5¼ +¼ 5½Mar. 28, 2006 4½ +¼ 4¾ 5½ +¼ 5¾May 10, 2006 4¾ +¼ 5 5¾ +¼ 6June 29, 2006 5 +¼ 5¼ 6 +¼ 6¼Aug. 17,2007  —  —  — 6¼ -½ 5¾Sept. 18, 2007 5¼ -½ 4¾ 5¾ -½ 5¼Oct. 31, 2007 4¾ -¼ 4½ 5¼ -¼ 5Dec. 11, 2007 4½ -¼ 4¼ 5 -¼ 4¾Jan. 22, 2008 4¼ -¾ 3½ 4¾ -¾ 4Jan. 30, 2008 3½ -½ 3 4 -½ 3½Mar. 18, 2008 3 -¾ 2¼ 3¼b -¾ 2½Apr. 30, 2008 2¼ -¼ 2 2½ -¼ 2¼Oct. 8, 2008 2 -½ 1 ½ 2¼ -½ 1¾Oct. 29, 2008 1 ½ -½ 1 1¾ -½ 1¼Source:  Federal Reserve System.a.  As of January 6, 2003, 2¼% was the new primary rate and 2¾% was the secondary rate.b.  On March 16, 2008, the Board reduced the rate by ¼% to 3¼%.

Federal Reserve Interest Rate Changes: 2001-2008

Makinen, Gail

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Federal Reserve Interest Rate Changes: 2001-2008

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