A Timeline of Federal Reserve Interest Rate Policy
1913-1935: A Central Bank Without a Single Policy Rate
The Federal Reserve Act, signed by President Woodrow Wilson in December 1913, created twelve regional Reserve Banks, each of which set its own discount rate — the rate charged to member banks borrowing at the discount window — subject to review in Washington. There was no single national policy rate and no committee charged with setting one. Open market purchases of government securities began in the early 1920s almost by accident, when Reserve Banks bought securities to earn income and discovered that the purchases moved money market conditions. The Banking Act of 1933 gave the resulting coordinating body a statutory basis as the Federal Open Market Committee, and the Banking Act of 1935 reorganized it into its modern form, concentrating monetary policy authority in Washington and renaming the Federal Reserve Board the Board of Governors.
1951: The Treasury-Fed Accord
During the Second World War the Fed agreed to hold down the government's borrowing costs by pegging yields on Treasury debt, which meant buying whatever quantity of securities was needed to defend the peg. That commitment left the central bank unable to restrain inflation, a problem that became acute after the Korean War began in 1950. In March 1951 the Treasury and the Federal Reserve announced an Accord ending the peg and freeing the Fed to set policy independently of the Treasury's financing needs. Historians treat the Accord as the founding moment of the modern, operationally independent Federal Reserve. William McChesney Martin, who had helped negotiate it from the Treasury side, became Fed chair within weeks and served until 1970 — the longest tenure in the institution's history.
The 1970s: The Great Inflation
Under Arthur Burns, chair from 1970 to 1978, and briefly under G. William Miller, the Fed repeatedly lost control of inflation. Rate increases tended to be reversed as soon as unemployment rose, so each cycle ended with inflation higher than the one before. The breakdown of the Bretton Woods system after August 1971, the wage and price controls of the early 1970s, the 1973 oil embargo, and the oil shock that followed the 1979 Iranian revolution all contributed. So did a policy framework that underestimated how far the public's expectations of future inflation had shifted, and that leaned on the idea of a stable trade-off between inflation and unemployment. Consumer price inflation, which had run near one to two percent in the early 1960s, reached double digits twice during the decade.
1979-1982: The Volcker Shock
Paul Volcker became chair in August 1979 and, at a special Saturday meeting on October 6, 1979, announced that the FOMC would change its operating procedure: it would target the quantity of bank reserves and accept whatever level of interest rates that implied. The federal funds rate became extraordinarily volatile and at points during 1980 and 1981 rose above nineteen percent. The policy produced back-to-back recessions, and unemployment climbed above ten percent in late 1982, the highest since the Great Depression. It also broke the inflation cycle: consumer price inflation fell from roughly fourteen percent in early 1980 to about four percent by 1983. The episode is the standard reference case for the idea that disinflation carries a real output cost.
1987-2020: Gradualism, the Lower Bound, and Back
Alan Greenspan, chair from 1987 to 2006, moved policy in small, well-telegraphed steps during a stretch of unusually low output and inflation volatility that economists later named the Great Moderation. Ben Bernanke's FOMC cut the federal funds rate target to a range of zero to 0.25 percent in December 2008 — the first time the Fed had reached what economists call the effective lower bound — and held it there for seven years, until the committee under Janet Yellen raised rates in December 2015. Jerome Powell's committee returned to that same near-zero range in an emergency move in March 2020, then beginning in March 2022 carried out the fastest sequence of increases since the Volcker era.