US Federal Reserve

US Federal Reserve Interest Rate

Latest Updates and History Since 1982

Today's US Fed Funds Rate Range

1.50% - 1.75%

Updated July 3rd, 2022

June 15, 2022 - Federal Reserve Update

Soaring Inflation Prompts Largest Rate Hike Since 1994

The Federal Open Market Committee (FOMC) meeting on June 15, 2022, ended with a 75-basis-point rate hike that brings the current Fed Funds Rate range to 1.50% - 1.75%. This is the largest rate hike by the Federal Reserve since 1994, and it follows up on an already historic 50-basis-point rate hike this past May.

Higher-than-expected inflation may have forced the Federal Reserve into an outsized rate hike this month. This month’s 75 bps hike comes about after the Federal Reserve signaled “only” 50-basis-point hikes for the June 2022 and July 2022 FOMC meetings. This jump up to a 75 bps rate hike shows that the Fed is becoming more aggressive in its battle against soaring inflation. The latest U.S. inflation rate for May 2022 was 8.6%, which is the highest rate seen in 40 years.

Highlights from the June 2022 Federal Reserve meeting include:

  • The Federal Funds Rate target range will increase by 75 basis points to 1.50% - 1.75%.
  • Quantitative tightening has officially begun with the unwinding of $30 billion of Treasuries and $17.5 billion of agency mortgage-backed securities (MBS) in June 2022.

Given that the Federal Reserve was off in its rate forecast and was forced into a larger-than-expected rate hike this month, it may signal that inflation has become an issue that requires more aggressive action. Whether or not this translates to another 75 bps rate hike in July 2022 remains to be seen. However, the Fed must tread lightly to avoid tipping the economy into a recession. According to the CME FedWatch Tool, markets are predicting a 90% chance for another rate hike of 75 basis points at the next FOMC meeting on July 27, 2022.

Fed Funds in the Last 5 Years

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US Federal Reserve Background

The US Federal Reserve System, also known as the Fed, is the central bank of the United States and is in charge of conducting monetary policy. It also supervises and regulates financial institutions like large banks and helps maintain the stability of the financial system. It was established in 1913 with the Federal Reserve Act signed by President Woodrow Wilson. It was given three main objectives: maximum stable unemployment, stable prices, and moderate long-term interest rates. Unlike other central banks like the Bank of Canada, the US Federal Reserve is not in charge of issuing or printing currency.

Non-Partisan: A Mix of Public and Private

The US Federal Reserve is a special combination of government and private groups that aims to be non-partisan. The Federal Open Market Committee (FOMC), the main decision-making body of the Federal Reserve, consists of 12 voting members: seven from the Board of Governors and five regional Reserve Bank presidents. While the Board of Governors are appointed by the President and the Senate, they are appointed for 14-year terms and can only serve a single term, giving them freedom from the political cycle or worry about re-appointment. The private sector also has significant input into the FOMC as commercial banks play a large role in deciding the presidents of the regional Reserve Banks. This combination of private and public allows the US Federal Reserve to remain non-partisan and make its decisions independently of the federal government.

US Federal Reserve Interest Rate

The US Federal Reserve interest rate, or the Fed Funds Rate, is the rate at which commercial banks in the US lend to each other overnight. Every commercial bank has a reserve that is required to be kept at Federal Reserve Banks - if a bank has more deposits than it needs, it can lend to another bank that has a shortfall.

The US Federal Reserve, as part of its monetary policy operations, aims to keep the Fed Funds Rate within a certain range. The FOMC meets eight times a year to set this range and can use the tools of the Federal Reserve System to make sure that the actual rate, the Effective Fed Funds Rate, is kept within their desired range.

US Federal Reserve Rate Cuts in 2020

In response to the outbreak of COVID-19 and economic shutdowns in the US, the US Federal Reserve moved rapidly to cut their target Fed Funds rate range. In an emergency meeting on March 4th, the Fed lowered their target range by 50 basis points from 1.5% - 1.75% to 1.0% - 1.25%. Only two weeks later, another emergency meeting was held on March 15th to drop the Fed Funds rate down to the zero lower bound with a 100 basis point cut. Their final target range of 0% - 0.25% has not been changed since and is likely to remain at the zero lower bound until at least 2021.

What is a Basis Point or bps?

Basis Point is a unit of measurement in finance for interest rates or other rates. Basis Points are useful when values are especially small making it hard to use percentages or absolute values.

  • 1 bps is equal to 1/100th of 1% or 0.0001
  • 100 bps is equal to 1% or 0.01
  • 300 bps is equal to 3% or 0.03

August 27th Speech by Jerome Powell

In a speech on August 27th, Fed Chair Jerome Powell announced that the US Federal Reserve System was adopting average inflation targeting as well as a more relaxed interpretation of the Phillips Curve and the relationship between employment and inflation. Both of these measures allow the Fed to continue quantitative easing and loose monetary policy for the foreseeable future without restrictions from concerns about rising inflation.

Given the continued dovish approach by the Fed, we do not expect the Fed to reduce its quantitative easing measures or increase its target Fed Funds rate range until at minimum 2021.

US Federal Reserve Meeting Schedule for 2022

DateFed Funds Target RangeChange
January 26th0% - 0.25%No Change
March 16th0.25% - 0.5%+0.25
May 4th0.75% - 1%+0.5
June 15th1.5% - 1.75%+0.75
July 27thTo Be Decided--
September 21stTo Be Decided--
November 2ndTo Be Decided--
December 14thTo Be Decided--
DateFed Funds Target RangeChange
December 14th0% - 0.25%No Change
November 2nd0% - 0.25%No Change
September 21st0% - 0.25%No Change
July 27th0% - 0.25%No Change
June 15th0% - 0.25%No Change
April 27th0% - 0.25%No Change
March 16th0% - 0.25%No Change
January 26th0% - 0.25%No Change
DateFed Funds Target RangeChange
December 15th0% - 0.25%No Change
November 4th0% - 0.25%No Change
September 15th0% - 0.25%No Change
July 28th0% - 0.25%No Change
June 10th0% - 0.25%No Change
April 29th0% - 0.25%No Change
March 23rd0% - 0.25%No Change
March 15th0% - 0.25%-1
March 3rd1% - 1.25%-0.5
January 28th1.5% - 1.75%No Change

Historical US Federal Reserve Interest Rates

Prior to the Great Financial Crisis, the US Federal Reserve used a target rate rather than a range. This became problematic when they lowered the rate to zero during the GFC. As a result, the US Federal Reserve changed their targeting system to a range-based system rather than a specific rate after the GFC.

The US Federal Reserve System

Structure of the US Federal Reserve

The US Federal Reserve is made up of three main bodies:

  • The Federal Open Market Committee (FOMC), responsible for making decisions on monetary policy
  • The Board of Governors, which is appointed by the Senate and oversees the Federal Reserve banks
  • The Federal Reserve Banks, 12 regional Reserve Banks that act as a "bank for banks" and provide information to the rest of the Federal Reserve system.
Structure of the Federal Reserve

The Federal Open Market Committee (FOMC)

The FOMC is responsible for making decisions on monetary policy for the US Federal Reserve. It is made up of 12 voting members: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents rotated on an annual basis. Traditionally, the chair of the Federal Reserve Board also acts as the chair of the FOMC and the president of the Federal Reserve Bank of New York acts as its vice-chair.

As part of its role in directing monetary policy, the FOMC is also in charge of executing monetary policy through "open market operations", foreign exchange interactions, and currency swap programs with foreign central banks.

The Board of Governors

The Board of Governors, or the Federal Reserve Board, oversees and governs the operations of the US Federal Reserve and its 12 Federal Reserve Banks. It is made up of seven members that are nominated by the President and confirmed by the Senate for 14-year terms. They can cannot be re-appointed. The Chair and Vice Chair of the Board of Governors are also nominated by the President and confirmed by the Senate and serve for 4-year terms, and may be reappointed.

The 12 Federal Reserve Banks

The US Federal Reserve conducts its operations primarily through 12 Federal Reserve Banks. Each bank is responsible for a specific region of the United States and acts as a "bank of banks" to local financial institutions. They provide financial and lending/depository services, collect economic information, and help to regulate and supervise local financial institutions. The president of a Reserve Bank is responsible for the day-to-day operations of the Reserve Bank and also serve on rotated appointments on the FOMC.

A Federal Reserve Bank is a special combination of private and public interests. They are owned by commercial banks who elect six of the nine members of the board of directors. The other three members are appointed by the Board of Governors. While a Federal Reserve Bank can make money from its operations and the services it provides to local financial institutions, all its net profits are given to the US Treasury and are not distributed amongst its shareholders.

The 12 Federal Reserve Banks are:

  • Federal Reserve Bank of Boston
  • Federal Reserve Bank of New York
  • Federal Reserve Bank of Philadelphia
  • Federal Reserve Bank of Cleveland
  • Federal Reserve Bank of Richmond
  • Federal Reserve Bank of Atlanta
  • Federal Reserve Bank of Chicago
  • Federal Reserve Bank of St. Louis
  • Federal Reserve Bank of Minneapolis
  • Federal Reserve Bank of Kansas City
  • Federal Reserve Bank of Dallas
  • Federal Reserve Bank of San Francisco

The Objectives of the Federal Reserve

The Federal Reserve Act of 1913 gives the US Federal Reserve three main goals:

  • Maximum sustainable unemployment
  • Stable prices
  • Moderate long-term interest rates

To understand these better, we can examine them one by one.

Maximum sustainable unemployment

The level of unemployment in an economy is an important factor in determining its productivity and the happiness of its citizens. Every economy has a natural rate of unemployment, which is defined by economists as the rate of unemployment that is compatible with a steady inflation rate or the rate of unemployment of an economy at full capacity. While a low unemployment rate is good, an unemployment rate below the natural rate of employment for an economy can lead to competition for workers and excess demand that can signify an overheated economy and bring inflation. An unemployment rate higher than the natural rate of unemployment means that the economy is not at full capacity and could be more productive. The Federal Reserve's job is to try to keep unemployment near its natural rate, which is estimated to be around 3% to 5% for the US economy.

The Phillips Curve and The Relationship Between Employment and Inflation

The Phillips Curve is an economic model named that describes the relationship between employment and inflation. The model suggests that there is an inverse relationship between the unemployment rate and inflation: if unemployment goes down, inflation goes up; if unemployment goes up, inflation goes down.

Phillips Curve

The slope of this inverse relationship changes based on where you are on the curve. If you already have a low unemployment rate and hot labour market, any further decreases in unemployment is likely to lead to a larger increase in inflation compared to if you started out with high unemployment. In addition, if you have high unemployment, going even higher will have less and less effect on inflation.

Stable prices

Stable prices, or stable inflation, is usually one of the most important goals of any country's central bank, including the US Federal Reserve. By keeping inflation, or the growth of prices over time, in check, the US Federal Reserve can maintain confidence in the US Dollar and minimize the costs associated with unstable inflation. For example, with stable inflation, a grocer can predict how expensive goods will be in the future and sign long-term contracts for workers and goods. However, if prices change dramatically from day to day, he cannot plan ahead and has to change prices day by day or risk losing money.

Although deflation, or decreasing prices, can seem like a positive for consumers, it can have a devastating impact on the economy. If you knew that prices were going to drop in the future, you wouldn't spend any money now. If everybody followed this principle, then consumption would stop and the economy would ground to a halt as nobody purchased any new goods or services. In addition, once you are used to deflation and flat or decreasing prices, it can be hard to get back to inflation or increased prices. This is one of the reasons why central banks aim to keep inflation above zero rather than at zero.

The Federal Reserve aims to keep annual inflation at around 2%, similar to the Bank of Canada and the central banks of other developed economies. The rate of inflation most commonly used by the Fed is the Personal Consumption Expenditures (PCE) price index, which takes into account a wide range of household spending but does not consider asset prices.

Average Inflation Targeting

Average inflation targeting is a new approach by the US Federal Reserve System that uses the 2% inflation target as an average rather than a target. This means that the Fed is willing to build inflation above 2% to make up for previous periods of lower inflation, and vice-versa. In contrast, their previous target approach used by most central banks would not take historical inflation into account and would always try to keep inflation as close to 2% as possible.

Given the previous decade of lower than 2% inflation and the deflationary impacts of COVID-19 on household spending, this gives the Fed more room to conduct quantitative easing and loose monetary policy without pressure from a possible rebound in inflation beyond 2%.

Moderate long-term interest rates

One of the less well-known mandates of the US Federal Reserve is its goal to maintain moderate long-term interest rates. This means to keep the interest rate of borrowings by businesses and governments (including cities and state governments) within a moderate range so that it remains affordable to borrow money and invest. While the definition of "moderate" is not clear, it can be taken to mean a rate at which enough investment is made to keep the economy running at its natural rate of unemployment and with stable prices.

All Connected

All three objectives of the US Federal Reserve are connected. By maintaining a moderate long-term interest rate, the US Federal Bank can encourage (or discourage) investment in the economy, which affects the unemployment rate. If the unemployment rate remains stable at the economy's natural rate, prices and inflation are likely to remain stable. There are, of course, many other factors that can affect any of these three goals, but it goes to show that how by achieving one of its goals, the US Federal Reserve is likely to achieve the rest.