Historical Fed Funds Rate

Historically, the Fed funds rate is usually between 2-5%. That's because the Federal Reserve has found that a healthy economy functions best with an inflation target of 2% (for the core inflation rate). However, there were certain times in history where the Fed funds rate was well above that, to curb runaway inflation. Other times, it was well below -- to stimulate economic growth. Understanding how the Fed funds rate was used in modern U.S. history will illuminate how the Federal Reserve deals with inflation and recession. It will also tell you how the Federal Reserve Chairmen have learned better ways to manage those two demons of economic growth.

The Fed Funds Rate reached a high of 20 points in 1979 and 1980. This was to combat double-digit inflation.

In 1973, inflation tripled from 3.9% to 9.6%. The Fed only doubled interest rates from 5.75 to a high of 11 points. However, inflation continued to remain in the double-digits through all of 1974, lasting until April 1975. The Fed continued raising the Fed Funds rate to 13 in July 1974, and then dramatically lowered the rate, reaching 7 1/2 by January 1975.

These sudden changes, known as stop-go monetary policy, confused price-setters, many of whom kept prices high, thus keeping inflation resistant.

This experience taught Fed Fund chairmen that managing inflation expectations were a critical factor in managing inflation itself.

The Fed Funds rate is currently at its all-time low, between zero and .25%. The Fed lowered it to this level on December 17, 2008, the 10th rate cut in a little over a year.

Prior to this, the lowest Fed Funds Rate was 1 point in 2003, to combat the 2001 recession. At the time, there were fears that the economy was drifting towards deflation.

A complete history of the Fed Funds Rate, from 1971 to the present, can be found at Federal Reserve Bank of New York. This shows both the change in the Fed Funds Rate and in the Discount Rate.