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A history of US Fed interventions and consequences

The central bank is now at the cusp of another round of momentous decisions

Gulf News

The Federal Reserve has been in the business of raising or cutting interest rates to better steer the changing dynamic of the US economy. Here are some pivotal moments of rate changes in the last 40 years.

Taming inflation (1979 to the 1980s/ Fed chairman: Paul A. Volcker)

In October 1979, Volcker held a late-Saturday-night news conference to announce a bold new package of measures to tame runaway inflation that was in part a result of oil price increases. The new policy raised the Fed’s benchmark rate by 4 percentage points, to 15.5 per cent, in a month.

By late 1980, rates reached a record high of 20 per cent.

Raising rates is often seen as a direct way to control inflation. Think of it as two sides of a see-saw: As one side goes up, it pushes the other down. Higher rates make it more expensive to borrow, slowing down an overcharged economy and restraining prices.

By using that tool in such powerful fashion, Volcker risked sending the economy into recession, which happened twice during his tenure (in 1980 and 1981-82). Among other things, his campaign brought about a spike in unemployment.

And with interest rates so high, both political parties attacked the Volcker-led fight on inflation.

But by 1983, inflation had fallen below 4 per cent, barely three years after a stretch in which it averaged 14.6 per cent. Today, Volcker’s actions are seen as setting the table for the long economic expansions of the 1980s and 1990s.

As a result of the Fed’s intervention, both unemployment and inflation were tamed.

Black Monday and economic worries (1987 to the 1990s/Fed chairman: Alan Greenspan)

Just a few weeks into Greenspan’s tenure in 1987, the Fed lowered rates after the stock market crashed, and he encouraged banks to continue lending.

In the early years of Greenspan’s tenure, inflation rose above 5 per cent as the economy improved, and he responded with a sharp increase in interest rates. He faced criticism for failing to cut rates quickly enough as the country fell into a recession in 1990-91.

But the 1990s were later marked by the longest peacetime expansion in the nation’s history. Greenspan resisted pressure to raise interest rates as unemployment declined.

He argued that increased productivity, including the fruits of the internet revolution, had increased the pace of sustainable growth.

Rates at Historic Lows (Sept. 11 attacks and after/Fed chairman: Alan Greenspan)

After having presided over what was known as the Great Moderation — nearly two decades of strong growth, modest inflation and low unemployment, with just a few bumps along the way — Greenspan was credited with acting quickly after the terrorist attacks of September 11, 2001, and the ensuing recession.

Although the recession was brief, economic growth continued to be sluggish. By 2003, the Fed cut its benchmark rate to 1 per cent, a 45-year low then regarded as the lowest viable level.

Ending stimulus (2004/Fed chairman: Alan Greenspan)

As the economy revived, the Fed removed its stimulus programme slowly, raising interest rates at 17 consecutive meetings. (Some economists now argue that the Fed should have moved more aggressively and that its slow retreat helped to fuel the housing bubble.)

The Great Recession (2008/Fed chairman: Ben S. Bernanke)

When Bernanke became chairman in 2006, the economy seemed to be humming along. But after the collapse in housing prices, the economy was plunged into what has become known as the Great Recession.

After the demise of Lehman Bros. in 2008 brought the financial system to the brink of disaster, Bernanke entered uncharted territory, pushing interest rates nearly to zero.

With little leverage on rates, he also persuaded colleagues to start buying bonds, a supplemental strategy to stimulate the economy known as quantitative easing.

Inflation target (2012/Fed chairman: Ben S. Bernanke)

In January 2012, the Fed formally adopted a 2 per cent inflation target, although it found itself at that point trying to raise inflation to that level rather than driving it down. The Fed was increasingly worried that sluggish inflation was restraining economic growth.

Putting the crisis behind (2015/Fed chairwoman: Janet L. Yellen)

In 2015, a year after Yellen took over as chairwoman, the Fed raised interest rates for the first time since the financial crisis. It cited the steady growth of employment and other economic measures, and signalled that it expected to raise rates more quickly in the coming years to prevent the economy from overheating.

— New York Times News Service