Monetary Policy

The Most Aggressive Tightening Cycle in Decades

Coming off historically low interest rates in the wake of the pandemic, the Fed has taken very aggressive action to tame inflation throughout the past two years. Between March 2022 and July 2023, the Federal Open Market Committee raised the federal funds target rate by 525 basis points, making this tightening cycle, which now appears to be over, the fastest in four decades. Between 2004 and 2006, the Fed raised its policy rate by a total of 425 basis points, but apart from that no other tightening cycle in the past 40 years comes even close to the current one in terms of scope and speed. Prior to that, the federal funds rate peaked at nearly 20 percent in 1980/1981, when the Fed was battling record-high inflation.

“Since early last year, the FOMC has significantly tightened the stance of monetary policy. We have raised our policy interest rate by 5.25 percentage points and have continued to reduce our securities holdings at a brisk pace,” Powell said at a press conference on Wednesday. Looking ahead, Powell said that "while we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate."


This chart shows changes in the federal funds target rate in past tightening cycles (in percentage points).

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Annual Fed funds effective rate in the U.S. 1990-2023
Brazil: base interest rate 2005-2022
Volcker Shock: federal funds, unemployment and inflation rates 1979-1987
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Malaysia's bimonthly overnight policy rate 2019-2024
Monthly Fed funds effective rate in the U.S. 1954-2024
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Monthly central bank key interest rates by country APAC 2022, by country

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