A History of the Feds Monetary Policy since the Start of the 21st Century

The Dotcom Bubble

The late 1990s and early 2000s were characterised by a “dot-com bubble,” a period of excessive investor enthusiasm that inflated asset prices beyond their fundamental value. This led to the “dot-com bust” of 2001, which saw the stock market crash. On top of this, the 9/11 terrorist attack happened, causing more investor fear and slowing investment.

The Fed reacted by cutting rates a total of 5.25 percentage points when they saw the recession bring GDP down and raise unemployment. Later in 2002, the Fed was worried that market recovery was becoming anaemic, leading to another 50 bps cut. In 2003, inflation was worryingly low, with Core PCE at 1.78% in January and 1.47% nine months later. The Fed cut the federal funds rate by another 25 bps to bring inflation closer to their 2% target.

Housing Market Bubble

After the dotcom recession, markets recovered quickly. GDP expanded from +1.7% in 2003 to +3.9% in 2004. By 2005, people were already talking about a bubble in U.S. housing markets. The Fed hiked rates 17 times in two years, raising the federal funds rate by 4 percentage points. Inflation remained pretty low, with Core PCE topping out at 2.67% in August 2006. By the end of the cycle of rate increases, the unemployment rate sat at 4.6%, and inflation started to decline toward +2%.

By early 2007, the housing market bubble was bursting, and unemployment started to rise. The Fed began cutting rates in September 2007, eventually cutting them by 2.75 percentage points in less than a year.

The Great Recession started in December 2007 and lasted until June 2009. Americans saw the value of their homes collapse by 20–30%, and the stock market did not reach its bottom until early 2009. The unemployment rate grew from 5% in December 2007 to 10% by October 2009.

After lowering rates to zero, the Fed began implementing a new type of monetary policy known as quantitative easing (QE). Unable to cut rates any further, it began buying trillions of dollars’ worth of bonds to stimulate the economy and get Americans back to work.

Post–Housing Market Bubble

In late 2008, the Fed slashed rates to zero in an unprecedented attempt to help the U.S. economy cope with the fallout from the 2008 global financial crisis. Seven years later, the central bank began raising rates as the economy recovered gradually.

Core PCE inflation was 1.1% in December 2015, well below the Fed’s target. It would not hit 2% until March 2018. Meanwhile, the nation’s unemployment rate had another 1.5 percentage points to fall over the next four years or so.

The Fed cut interest rates by a quarter of a percentage point three times in 2019, easing midway through the typical expansion-to-recession business cycle.

In 2019, the U.S. and China were in conflict over trade—a so-called “trade war”—and the Fed was concerned that the conflict would harm the economy and push up unemployment. Three modest rate cuts in the second half of 2019 had a positive effect on the economy.

Covid-19 Recession

The Covid-19 pandemic spread across the globe in February 2020, leading public health officials worldwide to recommend lockdowns to stop the spread of the virus and ease hospital caseloads. Roughly 20.5 million jobs were lost in April 2020 alone, with the unemployment rate jumping to 14.7%.

The Fed delivered two huge rate cuts at unscheduled emergency meetings in March 2020, returning the federal funds target rate range to 0–0.25%.

Post Covid-19

The subsequent rise in inflation was caused by a recovery driven by massive fiscal and monetary stimulus, which increased purchasing power at a time when production and supply chains were severely restricted. This pushed Core PCE from +0.9% in April 2020 to +5.5% in March 2022.

Between March 2022 and July 2023, the Fed raised rates by more than five percentage points, bringing inflation to +2.6% in May 2024. The unemployment rate, on the other hand, fell from 14.7% in April 2020 to 3.6% in April 2022.

Core PCE trended down from 2023 highs toward inflation-target levels through 2024–25. Although closer to 2%, many readings stayed modestly above target, which is why the Fed’s easing was gradual rather than aggressive.

After unusually low unemployment in 2023, job market conditions softened through 2024 and into 2025, with unemployment rising gradually. This slower labour market made policymakers more comfortable cutting rates to support job creation and prevent a sharper downturn. GDP forecasts for 2025 were revised lower (e.g., modest growth around ~1.4–2.0%, depending on the estimate), signalling a moderation in economic activity. Slower growth contributed to the Fed’s decision to ease policy further as 2025 progressed, balancing growth support with inflation control.

Across three consecutive meetings (September, November, December 2024), the target rate was reduced by a total of 100 basis points (1.00%), bringing the range down to 4.25–4.50% by end-2024.

Starting in September 2025, the Fed cut rates another three times, totalling 75 bps.