Order Code 98-856 E
Updated January 31, 2007
Federal Reserve Interest Rate Changes:
2000-2007
Marc Labonte and Gail E. Makinen
Government and Finance Division
Summary
The Federal Open Market Committee (FOMC) decided on January 31, at its first
scheduled meeting in 2007, to hold the target rate for federal funds at 5¼%, the rate
fixed on June 30, 2006. This is the fifth consecutive meeting at which the rate was held
constant after 17 previous increases. In a public statement issued at the conclusion of
its meeting, the FOMC made several comments that describe its current thinking: (1)
while economic growth has firmed and tentative signs of stabilization have appeared in
the housing market, the economy seems likely to expand at a moderate pace over
coming quarters, and (2) while the core inflation rate has improved in recent months
and inflationary pressure seems likely to moderate over time, the high level of resource
utilization has the potential to sustain inflationary pressures. Thus the FOMC judges that
further measured policy firming is not now needed. The FOMC concluded its statement
with a reminder that some inflation risks remain that may require additional response.
The Board of Governors also decided to keep the discount rate for primary credit
unchanged at 6¼%. The next meeting of the FOMC is set for March 20/21, 2007. This
report will be updated as events warrant.
Rates Changes
The Fed directly changes two interest rates. The first, called the discount rate, is an
administered rate explicitly set by the Fed. It is the rate at which the Fed lends short-term
funds to banks, pursuant to P.L. 96-221, the Monetary Control Act of 1980. It is
determined by the seven-person Board of Governors of the Federal Reserve System. The
second, known as the federal funds rate, is a market rate at which banks lend to each other
overnight to meet their “reserve requirements” and other liquidity needs. The Fed sets a
target for this rate and buys and sells U.S. Treasury securities with an aim to achieving
the target, which speedily becomes known to market participants. It is decided by a 12-
person Federal Open Market Committee, which includes each member of the board plus
a varying five-person roster selected from among the 12 regional Federal Reserve Bank
presidents (among the 12, the New York bank is always represented on the FOMC).

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The period between January 3, 2001, and June 25, 2003, was one of monetary easing.
In 13 moves, the FOMC voted to lower the target for the federal funds rate to 1% from
6½%. The target rate was then held at this level for one year. On June 30, 2004, the
FOMC began to tighten policy by increasing the target to 1¼%. This stance was continued
with the target raised by ¼% at meetings held on August 10, September 21, November
10, and December 14, 2004; February 2, March 22, May 3, June 30, August 9, September
20, November 1, and December 13, 2005; and January 31, March 28, May 10, and June
29, 2006. At its meetings on August 8, September 20, October 25, and December 12,
2006, and January 31, 2007, it decided against additional increases. The target rate now
stands at 5¼%, a rate last seen early in 2001. In a companion move over the period of
FOMC easing, the Board of Governors also lowered the discount rate until it stood at ¾%.
On January 6, 2003, the board announced a fundamental change in the discount rate
procedure. From that date, the discount rate was made to be a penalty rate for those banks
who chose to borrow from the Federal Reserve to meet temporary reserve deficiencies as
opposed to borrowing in the federal funds market. A primary discount rate of 2¼% was
set for banks judged to be in a sound financial condition, while banks whose financial
condition was judged to be riskier would be required to pay a higher secondary rate of
2¾%. At its meeting on June 24-25, the board lowered the primary discount rate by 25
basis points (100 basis points equals 1%) to 2%. The secondary rate was lowered
immediately by most regional Federal Reserve Banks to 2½%. The board raised both
rates by ¼% on June 30, August 10, September 21, November 10, and December 14,
2004; February 2, March 22, May 3, June 30, August 9, September 20, November 1, and
December 13, 2005; and January 31, March 28, May 10, and June 29, 2006. At its
meetings on August 8, September 20, October 25, and December 12, 2006, and on
January 31, 2007, it decided against additional increases in the discount rate for primary
credit. That rate now stands at 6¼%, a rate last seen early in 2000.
Other market interest rates, especially short-term rates, are influenced by changes in
the federal funds target and the discount rate, but they do not change one-for-one with the
changes in these rates.
Understanding the Announcements
Because the discount rate is administered, changes in it are stated explicitly. Hence,
the changes shown in Table 1 are exact. Because the federal funds rate varies somewhat
in response to market conditions, when the Fed changes only the federal funds rate, it may
specify the target rate, or it may only announce that it is “increasing [or decreasing]
slightly the degree in pressure on reserve positions” and that the action is “expected to be
associated with a small increase [or decrease] in short-term money market interest rates.”
In the latter case, the size of the rate change must be inferred. Hence, some of the federal
funds rates in the table are approximate, based on observation instead of announcements.

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Table 1. Recent Interest Rate Changes
Federal Funds Rate Target
Discount Rate
Date
Before
Change
After
Before
Change
After
May 16, 2000
6%
+½
6½%
5½%
+½
6%
Jan. 3, 2001
6½
-½
6
6
-½
5½
Jan. 31, 2001
6
-½
5½
5½
-½
5
Mar. 20, 2001
5½
-½
5
5
-½
4½
Apr. 18, 2001
5
-½
4½
4½
-½
4
May 15, 2001
4½
-½
4
4
-½
3½
June 27, 2001
4
-¼
3¾
3½
-¼
3¼
Aug. 21, 2001
3¾
-¼
3½
3¼
-¼
3
Sept. 17, 2001
3½
-½
3
3
-½
2½
Oct. 2, 2001
3
-½
2½
2½
-½
2
Nov. 6, 2001
2½
-½
2
2
-½
1½
Dec. 11, 2001
2
-¼
1¾
1½
-¼
1¼
Nov. 6, 2002
1¾
-½
1¼
1¼
-½
¾
Jan. 6, 2003
—
—
—
2¼a
—
—
June 25, 2003
1¼
-¼
1
2¼
-¼
2
June 30, 2004
1
+¼
1 ¼
2
+¼
2¼
Aug. 10, 2004
1¼
+¼
1 ½
2¼
+¼
2½
Sept. 21, 2004
1½
+¼
1 ¾
2½
+¼
2¾
Nov. 10, 2004
1¾
+¼
2
2¾
+¼
3
Dec. 14, 2004
2
+¼
2 ¼
3
+¼
3¼
Feb. 2, 2005
2¼
+¼
2½
3¼
+¼
3½
Mar. 22, 2005
2½
+¼
2¾
3½
+¼
3¾
May 3, 2005
2¾
+¼
3
3¾
+¼
4
June 30, 2005
3
+¼
3¼
4
+¼
4
Aug. 9, 2005
3¼
+¼
3½
4¼
+¼
4½
Sept. 20, 2005
3½
+¼
3¾
4½
+¼
4¾
Nov. 1, 2005
3¾
+¼
4
4¾
+¼
5
Dec. 11, 2005
4
+¼
4¼
5
+¼
5¼
Jan. 31, 2006
4¼
+¼
4½
5¼
+¼
5½
Mar. 28, 2006
4½
+¼
4¾
5½
+¼
5¾
May 10, 2006
4¾
+¼
5
5¾
+¼
6
June 29, 2006
5
+¼
5¼
6
+¼
6¼
Source: Federal Reserve System.
a. As of January 6, 2003, 2¼% was the new primary rate and 2¾% was the secondary rate.
Rationale for Changes
The Fed tries to keep the economy operating at an output level consistent with a low
rate of inflation. It therefore seeks a level of interest rates at which the economy will
grow at its potential to produce. The interest rate levels that produce this growth rate vary
with the course of the business cycle. Different rates are judged appropriate at different

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times. Changes in interest rates are the most visible signs of the Fed’s monetary policy,
immediately affecting financial institutions and markets of all kinds here and abroad.
Unusual financial market conditions such as those related to the Asian financial crisis of
1997-1998, the Russian debt crisis of 1998 and the terrorist attacks of September 2001
also influence Fed decisions on rate changes. The Fed reports to Congress twice yearly
on its monetary policy including rate changes, in oversight hearings in February and July
as originally required by P.L. 95-188, the Federal Reserve Reform Act.
Inflation-adjusted growth has been positive since the end of the recession in
November 2001. Because real GDP has now surpassed its previous high point at the end
of the 1991-2001 business cycle (by more than 15%), the economy is considered to be in
an expansionary rather than simply a recovery phase. The growth in demand that has
been achieved has been strong enough, in the face of a higher rate of productivity growth,
to bring about a gradual reduction in the unemployment rate. The rate now (December
2006) stands at 4.5%, up from an expansion low of 4.4%, first achieved in October 2006.
Job creation has been noticeably strong since August 2003.
While continuing to express the view that the economy is improving and moving
toward full employment, the FOMC adopted additional “insurance” at its 16 meetings
subsequent to June 30, 2004, in order to contain any tendency for the underlying or core
rate of inflation and inflation expectations to rise. At each of the 17 meetings (including
June 30, 2004), it raised the target federal funds rate by a quarter of a percentage point
until it reached 5¼%. Even though upward movements in the core inflation rate drew the
attention of the FOMC at its August 8, September 20, October 25, December 12, 2006,
meetings, recent moderation in that rate as well as the rate of growth of income appear to
be important reasons for leaving the target rate unchanged.
The FOMC concluded its public statement with the opinion that some additional
policy firming may yet be needed to contain the risk of inflation. Any moves in this
direction will depend on the evolution of the economy as described by incoming data. The
next scheduled meeting of the Federal Open Market Committee is set for March 20/21,
2007.
For further discussion, see CRS Report RL30354, Monetary Policy: Current Policy
and Conditions, by Marc Labonte and Gail Makinen.
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