The Fastest Cycle: From Zero to Five and Back

Zero again (2020–21). The second descent to zero was faster than the first. In 2008, it had taken Bernanke fifteen months to cut from 5.25% to zero. In 2020, Powell did it in twelve days — two emergency cuts, on March 3 and March 15, took the rate from 1.55% to near-zero. Simultaneously, the Fed announced unlimited QE: it would buy Treasury bonds and mortgage-backed securities in whatever quantities were necessary. The balance sheet, which had been $4.2 trillion before COVID, would eventually reach $8.9 trillion — more than doubling in two years. Congress matched the Fed's monetary flood with a fiscal one: the CARES Act ($2.2 trillion in March 2020), the Consolidated Appropriations Act ($900 billion in December 2020), and the American Rescue Plan ($1.9 trillion in March 2021). Total pandemic-era fiscal stimulus exceeded $5 trillion. The money supply — M2 — surged 40% in two years, the fastest expansion since World War II.

"Transitory" (2021). Inflation arrived in spring 2021, and at first it looked manageable. Used car prices spiked. Lumber tripled. Semiconductor shortages idled auto factories. Powell and the FOMC characterized the price increases as "transitory" — the predictable result of supply chains struggling to reopen after COVID lockdowns. CPI hit 5.3% in June 2021. Then 5.4% in September. Then 7.2% in December. Each month brought a new forty-year high. Yet the Fed kept rates at zero through all of 2021, buying $120 billion in bonds per month while inflation raged. On November 30, 2021, Powell finally retired the word "transitory," calling it time to "retire that word and explain more clearly what we mean." By then, inflation had been above 5% for seven consecutive months. Critics called it the worst forecasting failure in the Fed's modern history.

Behind the curve (2022). The first rate hike came on March 16, 2022 — eight months after CPI had crossed 5%, twelve months after it had crossed the 2% target. It was a 25-basis-point increase, modest by any standard. But the next hike, in May, was 50 basis points. And then came June 15, 2022: a 75-basis-point increase, the largest since 1994. CPI had just printed 9.1% for June — the highest reading since November 1981. The Fed followed with three more consecutive 75-basis-point hikes in July, September, and November. In nine months, the rate went from near-zero to 4.10%. No previous Fed chair had raised rates this fast. Not Volcker, who had hiked aggressively but operated in a world of less liquid, slower-moving markets. Powell was executing Volcker-speed tightening in a financial system that had spent fourteen years acclimated to zero.

SVB and the banking crack (March 2023). The rapid rate increases exposed a vulnerability that the ZIRP era had created. Banks had loaded up on long-duration Treasury bonds and mortgage-backed securities when rates were near zero. As rates spiked, those bonds lost enormous value. Silicon Valley Bank, the 16th-largest bank in America, had $91 billion in held-to-maturity securities sitting on $15 billion in unrealized losses. When depositors — mostly tech companies — started pulling money, SVB couldn't raise cash without crystallizing the losses. It collapsed on March 10, 2023, the second-largest bank failure in US history. Signature Bank followed two days later. First Republic fell in May. The Fed created an emergency lending facility (BTFP) to backstop other banks. Despite the turmoil, Powell hiked again in March and May, eventually delivering one final 25-basis-point increase on July 26, 2023. The target range reached 5.25–5.50%, with an effective rate of 5.33%.

The plateau and the pivot (2023–25). Rates held at 5.33% for fourteen months — from August 2023 through September 2024. Inflation, which had peaked at 9.0%, fell steadily: 6.4% by December 2022, 3.1% by June 2023, 2.4% by September 2024. The economy, defying widespread recession predictions, kept growing. Unemployment remained below 4%. The "soft landing" — taming inflation without causing a recession — appeared to be working. On September 18, 2024, the Fed made its first cut in over four years: 50 basis points, a larger-than-expected move. Three more cuts followed by January 2025, bringing the effective rate to 4.33%. Then, as tariff-driven uncertainty clouded the outlook in early 2025, the Fed paused for eight months before resuming cuts in September 2025. By February 2026, the rate had eased to 3.64%.

The chart that defines this era is not the rate chart — it's the gap between the orange line (CPI) and the blue bars (Fed Funds). In the first half of 2022, CPI stood at 9.0% while the Fed Funds rate was just 1.2%. The gap — the real interest rate — was negative 7.8 percentage points. The Fed was running the most accommodative monetary policy since Arthur Burns in 1974, except Burns had done it with rates at 12%. Powell was doing it from zero. It took until the second half of 2023 for the Fed Funds rate to finally exceed CPI, achieving a positive real rate for the first time in the cycle. By then, inflation was already retreating on its own, as supply chains healed and base effects kicked in.

The speed of this cycle was unprecedented. From the first hike on March 16, 2022, to the peak effective rate of 5.33% in August 2023, the Fed raised rates by 525 basis points in sixteen months. Volcker's famous 1979–81 tightening moved 1,000 basis points — but it started from 10%, not zero, and markets in 1979 were structured to absorb rate shocks. Powell's hikes hit a financial system that had known nothing but ultra-low rates for fourteen years. That three major banks failed and the broader economy survived without recession may be the most remarkable outcome of the entire seventy-two-year story told in this series.