History of the Fed Funds Rate: Highs, Lows, and More

The Federal Reserve tends to keep the fed funds rate within a 2.0% to 5.0% sweet spot that helps maintain a healthy economy, but there have been exceptions. The nation’s benchmark rate has been increased well above that range at times to curb runaway inflation. It also has dipped well below 2% to stimulate economic growth.

Examining the Fed’s changes to the fed funds rate provides insight into how the Fed has managed both inflation and recessions.

Lowest Fed Funds Rate

The all-time funds rate low is effectively zero. The Fed has twice lowered the rate to a range of 0.0% to 0.25%. The first time was during the financial crisis of 2008, and the Fed didn’t resume raising rates until December 2015. 

The second time was in March 2020, as a result of the global health crisis. The Fed announced in June 2021 that it would keep rates in that range until 2023. Most recently, at the January 2022 Federal Open Market Committee (FOMC) meeting, the Fed said that it would keep its target for the fed funds rate at a range of 0.0% to 0.25%.

The lowest fed funds rate (before 2008) was in the range of 0.75% to 1.0% in 2003 in a move to combat the 2001 recession. There were fears that the economy was drifting toward deflation at that time.

Highest Fed Funds Rate

The fed funds rate reached a high of 20% in 1980 to combat double-digit inflation.

Inflation began to skyrocket beginning in March 1973 when President Richard Nixon disengaged the dollar from the gold standard. Inflation increased from 4.7% to 12.3% in December 1974. The Fed increased the fed funds rate from 7% in March to 11% by August.

Inflation continued to remain in the double digits through April 1975. The Fed increased the benchmark rate to 16% in March 1975, worsening the 1973 to 1975 recession. It then reversed course, dramatically lowering the rate to 5.25% by April 1975.

These sudden changes were part of a “stop-go” monetary policy, and they weren’t sustained enough to either end inflation or spur growth. Confused businesses kept prices high to stay ahead of the Fed’s interest rate spikes, which only made inflation worse. Fed leaders learned that managing inflation expectations was a critical factor in controlling inflation itself.

Federal Reserve chair Paul Volcker ended the Fed’s stop-go policy in 1979. He instead raised rates and kept them there to finally end inflation. That created the 1980 recession, but it thoroughly ended double-digit inflation, which hasn’t been a threat since.

Fed Funds Rate History

The charts below show the targeted fed funds rate changes since 1971. The Federal Open Market Committee (FOMC) didn’t announce its target interest rate after meetings until October 1979. The Fed adjusted the rate through its open market operations. Banks were forced to guess what the rates would be as a result. The Fed tried to fight inflation without managing the expectations of inflation.

The Fed began targeting the money supply to fight inflation in 1979. The fed funds rate fluctuated a great deal between 1979 and 1982 as a result. Then in 1982, the Fed returned to targeting the fed funds rate.

The FOMC formally announced its policy changes for the first time in February 1994. Its announcements since then have made clear what it wants the interest rate to be. This policy manages expectations of inflation and minimizes disruptions caused by surprises from the Fed.

These are the target fed funds rates, along with the events that triggered the changes in cases where they did so. The Fed typically announces a range for its benchmark rate. The tables below show the high end of the range, while the low end is a quarter-point lower. Each year also includes:

• The GDP
• The unemployment rate
• The inflation rate

Fed Chair Arthur Burns (January 1970-March 1978)

The GDP was 3.3% in 1971, the unemployment rate was 6.0%, and inflation was 4.4%.