The Federal interest rate in America rises and falls constantly according to the perceived state of the nation’s economic status. These cycles occur every few years and have occurred since America’s conception. One reason why the government may raise interest rates is to combat inflation, and a common reason to cut interest rates is when the economy is moving slowly and could benefit from more money flowing through the economy. In fact, for most of America’s history, the interest rates were very high compared to today and fluctuated quite rapidly.

 

The Federal Reserve was created in 1913, and it was not long after its conception that interest rates experienced immense volatility. In 1945, the Federal interest rates hit a low of 1.7% and swung to a staggering 15.8% all-time-high in 1981. This rise in rates was to combat the rampant inflation of the 1970s caused in part by goods such as oil and gas prices quadrupling in price.

 

In the times since the 15.8% all-time high, inflation subsided and rates have gradually reduced to a less than 1% mark and subsequently alleviated much economic pressure for Americans. During the Great Recession of 2008 caused by the sub-prime mortgage loans, Federal interest rates dropped again, this time nearly 50%, from 5% to 2.3%. This, in turn, allowed many Americans to recover faster from the economic fallout. The rates continued to decline until their recent increase in the second quarter of 2022. However, when we zoom out and look at the entire timeline it is hard to not be grateful for any rates below 5%.

 

Fortunately, this most recent spike has been short-lived and Americans appear to have a smoother road ahead. We expect the Fed to slowly return rates to the levels we saw 12 months ago, and shift a percentage or so every few years.

 

In one sentence, there is no need to be alarmed over the Federal funds rates at the moment.