ECO 306 Speaker Notes
The Federal Funds Rate is the most important interest rate in the world since it influences other
interest rates as well as the value of the US currency. The interest rate that banks will pay when
borrowing money overnight on the federal funds market is known as the federal funds rate. The
rate affects credit card interest rates as well (Amadeo, 2021). To support employment and control
inflation, the Federal Open Market Committee (FOMC) modifies the Federal Funds Rate
benchmark. The FOMC's activities are a means of fostering a robust economy.
Even When I was a sophomore in high school when these events occurred, I decided to focus my
analysis on the years 2000 through 2010. Starting in 2000, while the Dot Com explosion was still
in recovery, a lot transpired throughout this decade. The terrorist attacks on the United States in
2001 caused an even worse economic crisis, and uncertainty caused it to become even more
unstable. Another economic shock brought on by the housing crisis that began in 2007 would
require years to recover from.
Following the attacks, the stock market was shut down for a week, the DOW fell by 700 points,
and the third quarter of 2001 saw a 1.7% decline in GDP. To aid in the recovery of the economy,
the FOMC cut interest rates by 0.5% to 3.0%. The FOMC attempted to stimulate the economy by
decreasing interest rates, but by June 2003, unemployment had risen to 6.3%. (Amadeo, 2021).
Federal funds rates were thought to be abnormally low.
Federal funds rates can be impacted by a number of risk variables, including inflation, economic
growth, financial circumstances, and employment levels. The FOMC lowered interest rates in
response to the recession of 2001 in an effort to fight inflation and boost the economy. The
economy was at risk from the unemployment rate increasing to 6.3% in 2003. The cost of
fighting The War on Terror was also a risk factor that had a negative impact on the economy
since less money was allocated to infrastructure and more money was spent on defense.
The housing bubble and financial crisis, which led to a worse economic collapse than the Great
Depression, were additional risk factors. The federal funds rate was reduced by both crises to
historically low levels of almost 0%. These rates were established in response to the country's
economic crisis. At the same time, in 2009, mortgage interest rates reached an all-time low of
5.04%. (Miller, 2021). With interest rates being low for a large portion of the following decade,
the recovery was lengthy and gradual.
The Committee is in charge of making monetary choices that promote maximum employment,
maintain inflation stability, and restrain long-term interest rates. The FOMC may decide to
decrease interest rates if the economy appears to be slowing down in order to encourage
companies to increase hiring and investment (Foster, 2021). Due to a mismatch in the growth
rates of aggregate demand and supply, interest rates increased at the turn of the century. As a
result, the FOMC opted to tighten monetary policy when it convened at the beginning of 2000
since there was little indication that raising interest rates would bring supply and demand into
balance (Monetary Policy, 2000).
During the first decade of the new century, productivity growth was aided by the development of
information technology (IT) and the increasing use of the internet. Productivity fell in several
other areas throughout this decade, including the aviation and service sectors, which contributed
to the sluggish economy (Spotlight on Statistics, 2021). Despite the FOMC maintaining interest
rates at historic lows, the Great Recession's high unemployment rate was caused by the crisis's
economic unpredictability.
