Question

Source: Board of Governors of the Federal Reserve System (US) Customize I Download Data I FRED - Economic Data from the St. Louis Fed Biock content from this web address

1. Recall that the shaded areas in the FRED graph indicate U.S. recessions. How were the upper and lower limits of the federal funds rate target adjusted after the end of the 2007-2009 recession?

Answer 1

The Federal Reserve increased the federal funds rate target gradually after the end of the 2007-2009 recession, from near-zero levels in 2009 to over 2% before the COVID-19 crisis in 2020 when rates were again slashed.

Step-by-step explanation:

After the end of the 2007-2009 recession, also known as the Great Recession, the U.S. Federal Reserve followed a cautious approach in adjusting the upper and lower limits of the federal funds rate target. Initially, the rate had been dramatically reduced to near zero levels to combat the recession.

By 2009, the federal funds rate had been cut to approximately 0.16%. Once the economy began to recover, the Federal Reserve incrementally increased the rate in response to improving economic indicators such as unemployment rates, which started to decline.

Thus, from near-zero, the federal funds rate was raised gradually over the ensuing years, reaching over 2% before the COVID-19 pandemic hit in 2020, leading to another reduction to about 0.05% in March 2020 to support the economy during the new crisis.