Economy

Modern History of Surprise Rate Cuts: Do They Actually Work?

1998 Multiple Factors

The Federal Reserve had a surprise interest rate cut under Greenspan on October 15, 1998, due to the simultaneous events of a financial crisis in Russia, around what became the Asian Contagion (economic, not viral) and around the failure of Long-Term Capital Management. The FOMC lowered rates to by just 25 basis points to 5.00% from 5.25%. At the time, the statement said:

Growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future. Against this backdrop, further easing of the stance of monetary policy was judged to be warranted to sustain economic growth in the context of contained inflation.

The FOMC again lowered fed funds to 4.75% on November 17, 1998, before raising rates in 1999 and in 2000 to get back to a peak of 6.5%.

2001 Faced Ongoing Concerns and Terrorism

Back in 2001, the Fed was very aggressive in cutting interest rates in the wake of the tech bubble bursting in 2000. The Fed actually had raised interest rates in 2000, despite the stock market drop, but on January 3, 2001, Greenspan and his Fed members decided to cut rates right at the start of the year. The first surprise interest rate cut of the 21st century came on January 3, 2001. That FOMC statement said:

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 6 percent. … These actions were taken in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power. Moreover, inflation pressures remain contained. Nonetheless, to date there is little evidence to suggest that longer-term advances in technology and associated gains in productivity are abating. … The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.

After the surprise rate cut in January of 2001, there were six interest rate cuts ahead of the 9/11 terrorist attacks, which ended up being a total of 11 rate cuts by the end of 2001.

Despite additional interest rate cuts having been seen in 2001, the news flow of that year was still looking grim, even before the terror attacks. Layoff announcements were made almost daily in the wake of the attacks, and the financial markets were closed for four trading sessions. The FOMC announcement of the emergency rate cut on September 17, 2001, said:

The Federal Open Market Committee decided today to lower its target for the federal funds rate by 50 basis points to 3 percent. … The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances. … Even before the tragic events of last week, employment, production, and business spending remained weak, and last week’s events have the potential to damp spending further. Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate. For the foreseeable future, the Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness.

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