The Covid-19 pandemic changed the world as we know it — more than 9.6 million people died, and countless more became ill: according to the CDC, 77% of Americans have been infected at least once. 

At the outset of the pandemic, people were stuck under stay-at-home restrictions, which caused businesses to shutter and snarled supply chains. GDP plummeted, the stock market crashed, and millions of people lost their jobs.

Through legislation like the CARES Act, the U.S. government granted forgivable loans to small businesses and sent stimulus checks to individuals and families struggling to make ends meet. In such a difficult time, the last thing the U.S. Federal Reserve wanted to do was make it harder for Americans to find work. That’s why the Fed waited so long to start hiking interest rates.

What are Fed rate hikes?

It’s important to note that the Fed does much more for the economy than simply adjust the dial on interest rates. It regulates the country’s banks, ensures the stability of its financial markets, and sets policies that maintain its dual mandate of promoting stable prices and maximum employment for the American people.

Unemployment levels skyrocketed during the Covid-19 pandemic, peaking at 14.7% in April 2020, and they wouldn’t return to pre-pandemic levels until March 2022. Therefore, the Fed’s first goal was to foster a favorable environment for job creation. It actually cut interest rates to zero in March 2020 and held them steady for two years.

Low interest rates make it easier for businesses to expand, homebuyers to obtain mortgages, and banks to lend to each other, all of which spur economic growth — and thus create more jobs.

For example, after the Financial Crisis of 2007–2008 and the subsequent Great Recession, the longest economic downturn since the Great Depression, the Federal Reserve, led by then-Fed Chair Ben Bernanke, slashed interest rates to nearly 0% for 6 years. Because businesses could access more credit, many hired more workers. As a result, the job market strengthened, ushering in one of the longest bull markets the United States has ever known.

Related: Looking back at the banking crisis of 2023

According to the Fed, the economy reaches “maximum” employment levels when everyone who wants a job has one — without generating inflationary pressures. But when inflation starts to creep in, the Fed must take the appropriate steps to tame these pressures, and one of the first ways it does so is by hiking interest rates.

How does the Fed decide when and how much to increase interest rates?

When the Fed meets every six weeks at its Federal Open Market Committee (FOMC) meetings, it looks at a wide range of economic indicators to determine whether to maintain, raise, or lower interest the Fed Funds rate, which is the interest rate range at which banks lend to one another and the prevailing interest rate that informs all others.

One of the reports it watches closely is the Employment Situation Report from the Bureau of Labor Statistics. This contains a survey of 60,000 U.S. households conducted by the U.S. Census that determines the country’s unemployment rate. The Fed also keeps an eye on the percentage of the population actively looking for work (the Labor Force Participation Rate), the number of people who have left their jobs (Labor Turnover Survey), and the number of job openings (JOLTS), to name a few.

But during the Covid-19 pandemic, in August 2020, Fed Chair Jerome Powell made an important change to the Fed’s overall strategy, calling maximum employment “a broad-based and inclusive goal.” He went on to say:

“Our policy decision will be informed by our assessments of the shortfalls of employment from its maximum level rather than by deviations from its maximum level… This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”

—Fed Chair Jerome Powell

Basically, that meant that the Fed wouldn’t be hiking interest rates just because unemployment levels were falling.

The Fed waited until March 2022 to raise interest rates because it wanted workers in low- and moderate-income communities to feel the benefits of a strong job market, something that became apparent during its “Fed Listens” tour, a series of events involving a diverse group of Americans, from union members to small business owners, retirees, and more. 

“One of the clear messages we heard was that the strong labor market that prevailed before the pandemic was generating employment opportunities for many Americans who in the past had not found jobs readily available. A clear takeaway from these events was the importance of achieving and sustaining a strong job market, particularly for people from low- and moderate-income communities,” the Fed stated.

The National Institute of Health (NIH) reported that Covid-19-related employment changes were “inequitably patterned by race, gender, and education,” as Black, Latinx, and non-white women without a high school degree faced the highest percentage of job losses. For example, Black, Latinx, and other non-white men without a high school degree were 90% less likely to switch to remote work than similar demographics with a high school degree, and the NIH added that none of the men it interviewed between May 2020 and May 2021 were able to make that transition.

The White House also found that Black Americans’ unemployment levels peaked at 16.8% during the Covid-19 pandemic, which was substantially higher than the national average of 14.7%. And since 2020, the report discovered that Black men and women had particularly benefited from the exceptionally tight labor market, seeing wages rise 7.8% compared with just 6.3% overall, as they transitioned into higher-paying jobs and industries.

The Fed’s goal of inclusivity wasn’t solely centered on racial demographics. Powell also noted that the Fed monitored unemployment rates and participation rates for different age groups as well as genders. According to the U.S. Department of Labor, unemployment levels for women, for instance, peaked at 15.5% in April 2020, which was 0.8% higher than the national average. In testimony to Congress in February 2021, Powell noted that many women had left the workforce to care for their families during the pandemic — and added that improved access to child care might help them return to their jobs.

How do rate hikes curb inflation?

At the Fed’s January 2022 FOMC press conference, Powell stated that the Fed believed that “maximum” employment levels had been achieved. And while the Fed kept interest rates at near-zero levels, he predicted a rate hike in the near future, eyeing “a backdrop of elevated inflation.”

Inflation, which is defined as a period of rising prices, can spell disaster for an economy because businesses raise prices and workers expect more money, but people don’t actually have more money to compensate, which results in lower demand, souring confidence, and often, recession.

By 2021, the goods and services people needed to live their everyday lives had suddenly become more expensive. Powell attributed this to the supply and demand imbalances created by the pandemic and labeled it a “transitory” phenomenon at his July 28 press conference. At the January 2022 Fed meeting, he added that the Fed expected inflation would decline over the year.

But it didn’t.

Between March 2020 and January 2022, the average annual inflation rate was 6.34% according to the Bureau of Labor Statistics, which resulted in an 11% increase in prices as measured by the Consumer Price Index (CPI). The CPI rose to 9.1% in June 2022 alone, and food and energy prices soared — Russia’s invasion of Ukraine only exacerbated the problem. The Fed needed to take drastic measures to get the economy back on track.

Powell took a page from the book of another Fed Chair, Paul Volcker, who back in the 1970s had defeated the inflation monster. Inflation was even worse then than it was in the post-pandemic era, hitting 11% by 1979 and accelerating by 1% each month.

Volcker combated inflation by raising interest rates to staggering levels.

In just 2 years, Volcker hiked interest rates from 11.2% to an astounding 20%, effectively putting a temporary stranglehold on the economy. (That’s because when interest rates are high, banks are less willing to lend, businesses may cut their workforce, and the economy contracts.)

But in the end, Volcker’s tough-love tactics proved successful. By December 1982, the CPI was flat, and by 1986, it would hit the Fed’s 2% target.

How many times did the Fed increase rates? When is the next Fed rate hike?

The Fed hiked interest rates a total of 11 times between March 2022 and January 2024. This made the cost of borrowing more expensive, and the housing market slowed. The stock market also clocked in a lousy 2022, with the S&P 500 losing 19.4%.

But in 2023, the results the Fed was hoping for finally came to light as headline inflation fell by 3.1%. GDP continued to grow — by 3.3% in the fourth quarter alone, which was well above the 1.5% consensus estimates. And despite higher rates, consumer spending remained strong. Many believe the Fed achieved its hoped-for “soft landing,” which happens when it tightens interest rates but avoids a recession.

The Fed’s last rate hike, a 25-basis point increase, was on July 27, 2023.

As of January 2024, the Fed funds rate stands at 5.4%, its highest level since 2002.

Analysts predict the Fed will hold interest rates steady through its next few meetings and could begin cutting them as early as May 2024. (Access the Fed’s meeting schedule.)

A timeline of the Fed's interest rate hikes 2022–2023

• March 3, 2020: Citing “evolving risks to economic activity” from the coronavirus outbreak, the Fed held an emergency meeting, cutting interest rates by 0.5% to 1.0–1.25%
• March 11, 2020: The World Health Organization (WHO) declares Covid-19 a global pandemic
• March 15, 2020: In another emergency meeting, the Fed slashes rates to zero (a range of 0–0.25%) and launches a $700 billion quantitative easing program
• March 16, 2020: The Dow falls 12.9%, triggering a stock market crash. It would go on to lose a total of 37% before ending the year with a 7.3% gain
• April 2020: U.S. unemployment reaches an average of 14.7%, its highest level since 1948, although job losses for women and minorities are even higher
• August 28, 2020: At an economic symposium in Jackson Hole, the Fed announces a new strategy that calls maximum employment “a broad-based and inclusive goal”
• July 28, 2021: The Fed holds rates steady at near-zero levels, labelling rising inflation a “transitory” phenomenon
• January 26, 2022: Powell states that “labor market conditions are consistent with maximum employment” and predicts future interest rate hikes
• February 24, 2022: Russia invades Ukraine
• March 16, 2022: The Fed makes its first interest rate increase since 2018, raising rates by 0.25% to a level of 0.25–0.50%
• May 5, 2022: The Fed increases interest rates 0.50% to 0.75–1.00% and states that it anticipates ongoing increases to be “appropriate”
• June 2022: Inflation, as measured by the Consumer Price Index (CPI), peaks at 9.1%
• June 16, 2022: The Fed raises rates 0.75% to 1.50–1.75%
• July 28, 2022: The Fed hikes rates another 0.75% to 2.25–2.50%
• September 22, 2022: The Fed delivers another 0.75% rate increase, bringing rates to 3.00–3.25%
• November 3, 2022: It increases rates by 0.75% to 3.75–4.00%, adding that it is “prepared to adjust the stance of monetary policy as appropriate if risks emerge”
• December 15, 2022: This time, the Fed raises rates by 0.5% to 4.25–4.50%
• February 2, 2023: It adds another 0.25% increase to 4.50–4.75%
• March 23, 2023: The Fed increases interest rates by an additional 0.25% to 4.75–5.0% and launches the Bank Term Funding Program, which will aid distressed banks suffering from interest-rate risk
• May 4, 2023: The Fed hikes another 0.25% to 5.00–5.25%
• July 27, 2023: The Fed delivers its final 0.25% increase of 2023, bringing rates to 5.25–5.50%

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