Transcript USFEDLowInterestRatePolicyof2001-2006a

US FED Low Interest Rate
Policy of 2001-2006
Yonsei GSIS
Lei, Yanghua
Federal Reserve System
 It was founded by Congress in 1913.
 The central bank of the United States.
 Provide the nation with a safer, flexible, and
stable monetary and financial system.
Federal Reserve's duties
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Conducting the nation's monetary policy
Supervising and regulating banking institutions
Maintaining the stability of the financial system
Providing financial services to depository
institutions, the U.S. government, and foreign
official institutions
Policy Tools
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Open Market Operations
The Discount Rate
Reserve Requirements
Interest on Required Reserve Balances and
Excess Balances
Term Auction Facility
Primary Dealer Credit Facility
Term Securities Lending Facility
ABCP MMMF Liquidity Facility
Commercial Paper Funding Facility
Money Market Investor Funding Facility
Term Asset-Backed Securities Loan Facility
Federal funds rate
The Fed Funds Rate is the interest rate at which
private depository institutions lend balances at
the Federal Reserve to other depository
institutions, usually overnight. It is the interest
rate banks charge each other for loans.
Changing the target rate is one way the
Chairman of the Federal Reserve can influence
the supply of money in the U.S. economy.
Federal funds rate
The Federal funds target rate is determined
by a meeting of the members of the Federal
Open Market Committee which normally
occurs eight times a year about seven
weeks apart. Extenuating circumstances
may call for additional meetings, or off
meeting target rate changes, such as
occurred in 2008 due to the credit crisis.
Background
Dot-com Bubble
911
2001-2003
It caused an obvious slowdown in economic growth,
Stock market index fell seriously, and GDP growth
rate fell sharply from 5.0% in 2000 to 1.2% in 2001
In order to restore market confidence and achieve
a soft landing for the U.S. economy, Alan
Greenspan, the Central Bank of the United States
Federal Reserve Chairman, announced cuts in the
federal funds rate in 2001. There had been 11
times of cut and dropped by 4.75% since then
within one year.
Alan Greenspan
13th Chairman of the Federal Reserve
Aug. 11, 1987－Jan. 31, 2006
2002/11/6
1.25%
2001/12/11
1.75 %
2001/11/6
2%
2001/10/2
2.5 %
2001/9/17
3%
2001/8/21
3.5 %
2001/6/27
3.75 %
2001/5/15
4%
2001/4/18
4.5 %
2001/3/20
5%
2001/1/31
5.5 %
2001/1/3
6%
In just two years
FED funds rate 6%→1%
In early 2004, the federal funds target rate
dropped to 1% of the 45-year’s low point.
Effects
The impact of Low interest rate policy on the
automobile sales, housing construction and
housing prices are Beyond the normal level .
However, to provide more employment
opportunities for people, while reducing the risk of
deflation.
Effects
FED ultra-low interest rate policy implemented in
the United States has boosted the U.S. domestic
consumption and investment. In particular, the
gradual recovery of the economy stimulated the
residents’ demand for housing and further
propelled the house prices rising rapidly. The
house price index has risen from about 200 to
more than 250. It broke through 300 in the
second season of 2005, and the average annual
growth rate reached 5%.
House price index rose from about 200 in 2003 to
more than 250 in 2004.
Average annual growth rate reached 5%
2004-2006
The U.S. economy had finally reached its peak in the
second half of 2003. The GDP growth rate had gradually
risen from -1.40% to 7.49%. However, with the economy
rebound, the hidden problems emerged as well,
especially the growing real estate market bubble and the
increasing national inflationary pressures. In order to
cool down the overheated economy and prevent inflation,
the Fed started the rate hike cycle since June 2004. Until
June 2006, there had been 17 consecutive rate hikes
and the federal funds rate from 1% to 5.25%.
Consecutive rate hikes caused the house loan market
rate rising and the house price falling.
2006/6/29
5.25%
2006/5/10
5%
2006/3/28
4.75 %
2006/1/31
4.5 %
2005/12/13
4.25 %
2005/11/1
4%
2005/9/20
3.75 %
2005/8/9
3.5 %
2005/6/30
3.25 %
2005/5/3
3%
2005/3/22
2.75 %
2005/2/2
2.5 %
2004/12/14
2.25 %
2004/11/10
2%
2004/9/21
1.75 %
2004/8/10
1.5 %
2004/6/30
1.25 %
2004/6/25
1%
From June 2004 to June 2006
FED started the rate hike cycle
Raising interest rates 17 times
FED funds rate 1% → 5.25 %
6.5
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2001/1/3
2002/1/3
2003/1/3
2004/1/3
2005/1/3
2006/1/3
Effects
The demand of the real estate market rapidly
declined in the U.S. and the house price index
decreased speedy to negative growth due to
rapidly rising house prices, the Fed’s consecutive
rate hikes, the strong expectation of increasing
interest rate of the investors, and the excessive
high house purchase cost.
Effects
The U.S. residents who were under repayment
pressure because of a high burden of subprime
mortgage interest payments, had no choice but to
give up their real estate to avoid the repayment.
The Subprime mortgage companies had become
the direct victims because of lacking the sources
of repayment. The investors who held the assets
mortgage bonds had become the indirect victims.
Investment banks, insurance companies and other
financial institutions also suffered a huge blow.
Conclusion
A change in the federal funds rate, or even a
change in expectations about the future level
of the federal funds rate, can set off a chain of
events that will affect other short-term interest
rates, longer-term interest rates, the foreign
exchange value of the dollar, and stock prices.
In turn, changes in these variables will affect
households’ and businesses’ spending
decisions, thereby affecting growth in
aggregate demand and the economy.
End