The chart below shows the federal funds rate since January 2020. The economic contraction in early 2020 led to two interest rate cuts in March which returned the fed funds rate to its historical low of 0.00–0.25%, matching the rate that was implemented during the financial crisis. The historically low funds rate, combined with fiscal policy, helped spur an economic rebound. In 2022 the focus of the Federal Reserve, and central banks around the world, shifted to increasing interest rates to fight global inflation. From a historic low of 0.00 - 0.25%, the fed funds rate hit 5.25 - 5.50% in July 2023. The objective of the rate increases was to lower consumer and business spending, which in turn would lower inflation through reduced demand for goods and services even though global factors were the primary drivers of inflation. The demise of global inflation led central banks around the world to cut interest rates in 2024. In September, the Federal Reserve finally provided a long-awaited interest rate cut, as the fed funds rate was decreased 50 basis points to a target range of 4.75%–5.00%. Two more 25-basis point cuts occurred in November and December, bringing the fed funds rate to 4.25%–4.50%. The rate cuts followed eleven rate increases that occurred across 2022 and 2023. In addition, the cooling of the U.S. labor market contributed to the Federal Reserve’s decision to cut interest rates. At its March 2025 meeting, the Federal Reserve decided to keep the fed funds rate unchanged at 4.25%–4.50%. The Federal Reserve continued its projection for two interest rate cuts in 2025 and a yearend fed funds rate of 3.9%. Relative to its December 2024 economic forecast for 2025, expectations for economic growth declined while inflation increased. The Federal Reserve stressed that its economic projections were subject to a very high level of uncertainty, particularly stemming from the unknown effects of tariff policies. The changing nature of U.S. tariff policies increases the complexity for the Federal Reserve in instituting effective monetary policy. Effective Federal Funds Rate, January 2020 – April 2025 (Source: Federal Reserve Economic Database)
The Federal Reserve makes interest rate policy projections based on economic expectations. The economic expectations for 2025 are certainly subject to revision, and tariff policies significantly raise the uncertainty. The Federal Reserve strives to act in a nonpartisan, independent manner to implement policies for the long-term benefit of the U.S. economy. Ultimately, providing the Federal Reserve maintains its independence, policy and interest rate decisions will be guided by their dual policy mandate of achieving maximum employment and price stability. Economic Growth After solid economic growth since 2021 driven by consumer spending, the effect of tariffs would be the primary question for economic growth in 2025. U.S. tariff policies increased economic uncertainty and fueled fears of stagflation, defined as low (if any) economic growth with inflation. Uncertainties with tariffs included the magnitude of tariffs, how long the tariffs would remain in place, reciprocal tariffs, products excluded from tariffs, when tariffs would affect prices, and the long-term impact of how foreign countries view the desirability of the United States as a trading partner and global leader.
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Center for Business and Economic Insight
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