A Quick History of the U.S. Fed Fund Rate — the ups and downs, the quick reversal — more roller-coaster rides?
Since the beginning of the 2017/18 Subprime Mortgage Financial Crisis, the U.S. Federal Reserve (“The Fed”), the nation’s central bank, had assumed a significant (if not primary) role of stimulating the economy through a series of actions. This is not a new role, but the extent of the Fed’s actions had surpassed all previous ones. Central Banks from other countries have done likewise and indeed are still extending their simulative actions. Globally, from 2008 to 2015, central banks had introduced a new term, Quantitative Easing “QE”, an”extreme expansionary” form of monetary policy, to the financial markets as well as the general public.
After six tough years and for some economies, even eight years, the global economy had seen signs of economic recovery and with financial markets returning back to life.
By 2015, the Fed had set forth a plan for gradually raising the rates over the next few years (“normalize” was the phrase used). The action had been roundly criticized as undermining a still-fragile economic recovery. Others, however, have felt for some time that the stimulative actions that the Fed had taken then had set the stage for huge inflationary conditions in the future and that, if anything, the Fed waited much too long.
In hindsight, by the end of 2018, the economy did look stronger in some countries, and the U.S. had been doing great:
Targeted Fed Fund Rates was at a recent peak of 2.25%~2.50% [no longer 0.00% from 2009~2014]; other rates were correspondingly higher.
Then by the end of 2019, there were three separate 0.25% cuts to bring it back down to 1.50%~1.75%. What happened?
PS: in hindsight, the QE did not create any feared hyper-inflation globally.
Moving on, at the beginning of last year, 2020, we were caught by the unexpected, uncertain, somewhat fearful, quick development of the Coronavirus COVID-19 situation. With two unscheduled meeting cuts, we were back down to 0.00%~0.25% Fed Fund Rate Levels since mid March 2020. COVID-19 continued to razed through the entire 2020 and we are now at the beginning of a new year (and new hopes?).
And certain European 10-year Treasurys have long been in negative-yield situation.
Points of Discussion: Fed Interest Rate Action. Guidance — students can comment on any, or some of the following, certainly not limited to the following, and can offer personal insights regarding this broad topic:
Central Bank’s role in “peacetime” and during crisis.
Acting too soon or too late (to correct/help the economy)?
Acting too aggressive or not proactive enough (to correct/help the economy)?
Why the need to “normalize” interest rate? Or do we need to? Aren’t we living in abnormal times with regard to the state of economy and the level of interest rates for more than a decade?
Comparing recent crises — 9-11, Subprime, COVID-19 — how different are they with regard its impact on the economy and the financial markets? Does that warrant different Central Bank actions?
What else can the central bank do? Or may be they impotent and certainly no magicians?
Where can a central bank go once it is already at zero rate? PS: U.S. 10-year Treasury has been fluctuating slightly above and below the 0.60% mark during 2020Q4. Then in 2021Q1, it popped a LOT and easily more than doubled to around 1.56% [03/05/2021]. What explains the quick spike? Why are there so much recent inflation fears? Where is it heading? It is already making the stock market nervous.
Although U.S. 10T seems to be heading up (quickly) in the near term, why is it not the case in other countries’ 10T, e.g. Germany, U.K., China?
With such (still) low level of interest rates (= cheap to borrow), will excessive debt issues, both governments and corporates, sow the seeds for a future debt crisis? [remember, post 9-11 led to the Subprime financial crisis seven years later].
Finally, with the newly-elected Biden administration which in many ways has a “different approach” [right off the bat, “a stack of Executive Orders and pushing through a massive $1.9 trillion Rescue Package”] to governmental, socio, economic, and geo-polictical emphasis/agenda for at least the next 4 years, COVID-19 and Economic Recovery is/will be taking center stage. These certainly has an impact on interest rates and monetary policy.
What is the impact of the $1.9 trillion Covid Relief Bill on 2021/2022 and central bank policy?
If you are more familiar with a non-U.S central bank, how similar or how different have they been handling monetary policies in response to crises and her attempt to promote economic recovery?
Bottom-line: nobody knows where 2021 is heading, “it will be a tricky and challenging year”.
We would like to hear your thoughts. Please see Facilitator for guidance as well re content and format.
U.S. Fed Fund Rates since 2020 March: for better image quality → click this link
Fed cuts rate to 0% 2020-03-15
