Fed’s Falling Rate Expectations
To fight the worst recession in seven decades, the Federal Reserve reduced its key interest rate, called the federal funds rate, to a record low of 0 to 0.25 percent in December 2008. It left the rate there for the next seven years. The federal funds rate sets the cost of overnight borrowing by banks and helps determine the interest that banks charge on their business and consumer loans.
The Fed nudged it up by a quarter-point to a range of 0.25 percent to 0.5 percent last December. Since then, however, it has left the rate alone and trimmed its expectations for the pace of future rate hikes. It now projects just one hike this year.
It has also been reducing its projection for the longer-run “neutral” level for this key rate. This is important because it means that the Fed now believes it will not have to raise rates as high as it once did to keep the economy from overheating. That will keep future borrowing costs lower.
Here is a look at the recent history for the funds rate and the changes the central bank has made in its projections for the longer-run level of the rate.