The U.S. Federal Reserve has delivered on a surprise half-point interest rate cut to federal funds. Unfortunately, the stock market slid after Fed Chairman Powell gave his press conference and indicated that there are other coordinated events with central banks. The current stance is that the Fed is not looking beyond traditional rate cuts to help curb the economic damage from the rapid spread of COVID-19.

An overwhelming majority of interest rate cuts occur at the scheduled Federal Open Market Committee (FOMC) meetings. While it is unusual for the Fed to conduct emergency rate cuts, investors and economists who have been around have seen their fair share of “emergency actions” taken by the Fed. Investors and economists have every right to wonder if this surprise rate cut will make that much of a difference if people are more worried about getting sick than they are about already-low interest rates going even lower.

24/7 Wall St. has reviewed several other historical rate-cut announcements that were deemed to be unscheduled rate cuts or emergency rate cuts. Each instance has come with its own set of circumstances. They had ties to the financial crisis, the 9/11 terror attacks of 2001 and the 1987 stock market crash.

As Powell warned that the coronavirus poses evolving economic risks in his official statement on Tuesday, he also continued to hold the line that the Fed is monitoring for the economic outlook and that the FOMC will use its tools to support the economy. With stocks selling off sharply after an hour or so from the formal surprise move, many modern-day investors have never even seen a surprise interest rate cut. The markets seemed to be unimpressed at the onset, but history shows that after an emergency rate cut is made, there have been additional rate cuts not that long after.

Here is a list of the so-called emergency rate cuts made by the Fed in the modern era. These are meant to include the initial rate cuts that came as a surprise to the markets rather than every single instance. There was even a surprise rate hike in there also. We have focused on the effect of fed funds and not the discount rate, because it is the funds level that impacts the non-bank borrowers, such as individuals and businesses.

The 1987 Stock Market Crash

Alan Greenspan, the newly appointed Fed chairman at the time, announced an emergency interest rate cut of 0.50% after the Black Monday stock market crash of 1987. The stock market crash took place on October 19 of that year, but Greenspan’s move on October 30 took fed funds down to 6.75% from 7.25%. Rates were taken down to as low as 6.5% in 1988, but they were back up as high as 9.75% by the end of the year.

Stocks lost more than 20% in a single day in October of 1987. Greenspan defended that cut at the time, and the 1987 crash did turn out to be a short-lived issue that did not wreck the economy like the prolonged stock market drop that was a result of the financial crisis from 2008 into 2009. It can be debated whether that rate cut staved off additional major economic calamities, but it was as soon as 1988 that the Fed was hiking rates to fight inflationary pressures, and it was another year until the savings and loan crisis wiped out many undercapitalized or overleveraged banking groups with very bad loan portfolios.

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.

Less than two weeks after the official August 2, 2007, FOMC meeting announcement, the FOMC took action on August 17, 2007, by keeping fed funds flat at 5.25%, but it lowered the spread between the primary credit window and fed funds. The statement included the following:

These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets. Existing collateral margins will be maintained.

During the financial crisis, the Fed’s move to a zero interest rate policy (ZIRP) seemed unprecedented. There was a lot that happened before getting there. On January 22, 2008, the FOMC cut rates down to 3.50% from 4.25% in response to what had been rapidly declining economic conditions that began in 2007. The FOMC statement from January 22, 2008, said:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. … The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets. … The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. … Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

The FOMC again lowered interest rates by another half-point to 3.0% on January 30, 2008, and the Fed embarked on a total of seven rate cuts by the of 2008 for the fed funds rate to remain at the 0.00% to 0.25% range. Fed Chairman Ben Bernanke adopted ZIRP, the government wrote massive bailout checks to the banks and financial institutions, and the Fed started to greatly expand the Federal Reserve balance sheet. These lessons were against a backdrop that the Federal Reserve was very late to the party after the 1929 crash and that its lack of bold actions at the time allowed what could have been a routine recession to become the Great Depression that wiped out the 1930s.

The last surprise interest rate cut was on October 8, 2008, due to continued growing weakness and major pressure in the economy that became the financial crisis. Fed funds were taken to 1.50% from 2.00% prior to the zero-rate policy set in December of 2008. It would not be until December of 2015 that the first quarter-point rate hike would be seen under Fed Chairman Janet Yellen.

The 1994 Surprise Rate Hike

While surprise interest rate cuts have been made, it is much rarer for “emergency” rate hikes to be seen. That did occur back in April of 1994, after rates had already started to be hiked that year. That was when rates went up to 3.75% from 3.50% and fed funds went up to a high of 6.0%, after being hiked on February 1, 1995, to be followed by the first quarter-point rate cut almost exactly six months later.

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