1. US FED Low Interest Rate Policy of 2001-2006 Yonsei GSIS Lei, Yanghua

2. 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.

3. Federal Reserve's duties 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

4. Policy Tools Open Market Operations The Discount Rate Reserve Requirements Interest on Required Reserve Balances and Excess BalancesInterest 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

5. 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.

6. 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.

7. Background Dot-com Bubble911

8. 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

9. 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

10. 2002/11/61.25% 2001/12/111.75 % 2001/11/62 % 2001/10/22.5 % 2001/9/173 % 2001/8/213.5 % 2001/6/273.75 % 2001/5/154 % 2001/4/184.5 % 2001/3/205 % 2001/1/315.5 % 2001/1/36 % In just two years FED funds rate 6%→1%

11. In early 2004, the federal funds target rate dropped to 1% of the 45-year’s low point.

12. 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.

13. 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%.

14. House price index rose from about 200 in 2003 to more than 250 in 2004. Average annual growth rate reached 5%

15. 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.

16. 2006/6/295.25% 2006/5/105 % 2006/3/284.75 % 2006/1/314.5 % 2005/12/134.25 % 2005/11/14 % 2005/9/203.75 % 2005/8/93.5 % 2005/6/303.25 % 2005/5/33 % 2005/3/222.75 % 2005/2/22.5 % 2004/12/142.25 % 2004/11/102 % 2004/9/211.75 % 2004/8/101.5 % 2004/6/301.25 % 2004/6/251 % From June 2004 to June 2006 FED started the rate hike cycle Raising interest rates 17 times FED funds rate 1% → 5.25 %

17. 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.

18. 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.

19. 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.

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