It is a common misperception that the Fed has in the past raised rates pushing the US economy into recession. The last time that was true was in 1979, when the Fed raised its Discount rate from 9.5% starting in June of that year to 13.0% the following March – right in the middle of the 1980 recession. It was pretty much the final curtain for the Discount Window’s economic and policy relevance, and even then it is arguable as to what really caused that cyclical peak and the double dip that closely followed it (was it the response to inflation, or simply the inflation?).

In the past few business cycles, the Fed has made the simple mistake of believing the economy in a good to great position which it really wasn’t. It’s practically stamped institutionally on every official forecast, a baseline of over-optimism that hasn’t been warranted in at least twenty years.

The Fed “raised rates” starting in 1999, the almost totally immaterial Discount rate in addition to the federal funds target, to which many still assign responsibility for the dot-com recession, even the dot-com bust itself. Monetary policy no more popped the stock bubble than it was responsible for the mild recession that followed. Increasing the federal funds target six times from 4.75% to a peak of 6.50% would not have really been a material difference even if the system was actually that sensitive to the secondary (perhaps tertiary) federal funds costs.

Instead, Federal Reserve officials have made it a habit of picking nearer the top in the business cycle for the point at which to begin their activities. One primary reason for that, especially in the 21st century, has been the economy’s tendency to remain persistently weak even through what should otherwise have been recovery periods. That was certainly true in 2004-06, and it is so again 2009-ongoing. The Fed, given that persisting weak bias despite its own opposite one, is forced to wait for clearer signals of growth before it will act.

The official end of the dot-com recession was, according to the NBER, dated to November 2001. The Fed, however, was still reducing its federal funds target (and Discount rate) for almost another two years thereafter. It wasn’t until the economy accelerated in the housing mania that the FOMC under Greenspan was convinced the weak recovery had passed to full recovery.