Interest rates can be lowered to stimulate borrowing and spending when demand is otherwise weak or raised to damp demand and curb inflation. Before I arrived, the Fed had already responded to the weakening in the economy by aggressively lowering its federal funds rate target from 5-1/4 percent in September 2007 to 2 percent.
Two percent is extremely low for interest rates, but as the financial crisis intensified and the economic outlook grew more dire in the fall of 2008, the Fed continued to cut rates. For more than a year now, our policies have pushed down short-term interest rates close to zero.