The Federal Reserve is aggressively raising rates as high inflation continues. How does this compare to other periods of interest rate hikes over the past 35 years?

Comparing the Speed of U.S. Interest Rate Hikes

As U.S. inflation remains at multi-decade highs, the Federal Reserve has been aggressive with its interest rate hikes. In fact, rates have risen more than two percentage points in just six months.

In this graphic—which was inspired by a chart from Chartr—we compare the speed and severity of the current interest rate hikes to other periods of monetary tightening over the past 35 years.

Measuring Periods of Interest Rate Hikes

We used the effective federal funds rate (EFFR), which measures the weighted average of the rates that banks use to lend to each other overnight. It is determined by the market but influenced by the Fed’s target range. We considered the starting point for each cycle to be the EFFR during the month when the first rate hike took place.

Here is the duration and severity of each interest rate hike cycle since 1988.

The 2022 rate hike cycle is the fastest, reaching a 2.36 percentage point increase nearly twice as fast as the rate hike cycle of ‘88-‘89.

On the other hand, the most severe interest rate hikes occurred in the ‘04 – ‘06 cycle when the EFFR climbed by almost four percentage points. It took much longer to reach this level, however, with the hikes taking place over two years.

Timing Interest Rate Hikes

Why are 2022’s interest rate hikes so rapid? U.S. inflation far exceeds the Fed’s long-term target of 2%. In fact, when the hikes started in March 2022, inflation was the highest it’s ever been in the last six rate hike cycles.

In contrast, three of the rate hike cycles started with inflation at or below the 2% target. Inflation was just 0.30% in December 2015 when the Fed announced its first rate hike since the global financial crisis.

Some criticized the Fed for raising rates prematurely, but the Fed’s rationale was that it can take up to three years or more for policy actions to affect economic conditions. By raising rates early and gradually, the Fed hoped to avoid surging inflation in the future.

Fast forward to today, and the picture couldn’t look more different. Inflation exceeded the 2% target for 12 months before the Fed began to raise rates. Initially, the Fed believed inflation was “transitory” or short-lived. Now, inflation is a top financial concern and there is a risk that it has gathered enough momentum that it will be difficult to bring down.

Balancing Inflation and Recession Risks

The Fed expects to raise its target rate to around 4.4% by the end of 2022, up from the current range of 3-3.25%. However, they don’t foresee inflation reaching their 2% target until 2025.

In the meantime, the rapid interest rate hikes could lead to an economic downturn. Risks of a global recession have increased as other central banks raise their rates too. The World Bank offers policymakers a number of suggestions to help avoid a recession:

• Central banks can communicate policy decisions clearly to secure inflation expectations and, hopefully, reduce how much they need to raise rates.

• Governments can carefully withdraw fiscal support, develop medium-term spending and tax policies, and provide targeted help to vulnerable households.

• Other economic policymakers can help relieve supply pressures through various measures. For instance, they can introduce policies to increase labor force participation, enhance global trade networks, and bring in measures to reduce energy consumption.

Will policymakers heed this advice and, if so, will it prove sufficient to avoid a global recession?

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