rates multiple times, from 1.00% in 2003 to 5.25% in 2006. The increasing rates not only dampened the economy, but they also paved the way for increasing monthly mortgage payments on adjustable-rate mortgages. The result was that many home buyers were not able to pay monthly mortgage payments and homes were put up for sale. Home prices plummeted, defaults occurred on mortgage loans and mortgage-backed securities, foreclosures increased significantly, and the economy and stock market began a decline in late 2007 that lasted until early 2009 (the S&P 500 declined by nearly 60%). • In 2020 the economic shock was COVID-19. The pandemic let to record unemployment of 14.8% in April 2020 and the loss of over 20 million jobs. Economic growth returned in 2021 and continued through 2024. Generally, economic growth precipitates more economic growth, until a bump or shock occurs resulting in a recession. Increasing interest rates have the potential for creating an economic bump, as interest rate sensitive consumer and business spending generally decline as financing costs increase. However, recent U.S. economic growth was strong enough to continue despite eleven rate increases in 2022 and 2023. In addition to increasing interest rates, other factors such as tariffs and trade wars, energy price shocks, military conflicts, and financial market declines can also cause economic downturns. The economy is in great shape as 2024 concludes; unless an economic bump or shock occurs in 2025, moderate economic growth is expected to continue. Unless repealed or modified, economic growth in 2025 should also continue to benefit from infrastructure spending (the Infrastructure Investment and Jobs Act) and investments in semiconductor manufacturing (the CHIPS and Science Act). Interest Rates 2024 The Federal Reserve influences interest rates in the U.S. economy through targeting the “fed funds rate” – a very short-term interest rate that when changed, typically has a rippling effect through the financial markets. The fed funds rate is lowered to stimulate economic growth through increased consumer and business spending, as borrowing costs are generally reduced. 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%. Another 25-basis point cut occurred in November, and the fed funds rate was reduced to 4.50% - 4.75%. The rate cuts followed eleven rate increases that occurred across 2022 and 2023.The demise of global inflation led central banks around the world to cut interest rates in 2024. The rate decreases by the Federal Reserve followed interest rate cuts by the central banks of Europe, Canada, and England. In addition, the cooling of the U.S. labor market contributed to the Federal Reserve’s decision to cut interest rates. The chart below shows the federal funds rate since January 2020.
Effective Federal Funds Rate January 2020–November 2024 (Source: Federal Reserve Economic Database)
Central Wisconsin Report - Fall 2024
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