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AP PHOTOS: How the world looked: Changes since the Fed last raised interest rates in 2006

WASHINGTON – The housing market looked like a casino. BlackBerrys were ascendant. Twitter was 3 months old. Jesse Jackson was protesting high gas prices. Saddam Hussein was on trial. “American Idol” dominated American network TV. And cheeky Lightning McQueen from the hit film “Cars” first became a toy phenomenon.

The world was a rather different place the last time the Federal Reserve raised interest rates. Attached are some photos taken by photographers from the Associated Press of what was going on in 2006, the last time the Fed raised interest rates.

Back on June 29, 2006, the Fed raised the short-term rate it controls from 5 per cent to 5.25 per cent. Even though it had raised that rate 16 times since mid-2004, the Fed’s policymakers still saw “some inflation risks.”

At the time, only a handful of Cassandras were warning that the economy faced risks and that higher rates may not be such a good idea. After all, unemployment, at 4.6 per cent, was extremely low. And the Fed’s preferred inflation gauge had risen around 3 per cent from a year earlier — a bit too high for Fed policymakers.

The month after the Fed last raised rates, housing prices peaked and then fell into a gut-churning drop that would last 5 1/2 years. The housing market’s collapse ignited a financial panic that wiped out hundreds of banks, very nearly toppled the financial system and sent the American economy into the worst recession since the 1930s.

The Fed would wait more than nine years before raising rates again. On Wednesday, Fed policymakers raised the short-term rate they control to a range of 0.25 per cent to 0.50 per cent from between zero and 0.25 per cent.

The rate hike ends an interest-rate easing cycle that began in 2007. The Fed acted swiftly that September to chop rates. And it kept chopping. In December 2008, the Fed cut its benchmark short-term rate all the way to a record low near zero and held it there for nearly seven years.

In the years that followed, the economy mounted a fitful recovery, constrained by lingering damage from the Great Recession of 2007-2009. Unemployment peaked at 10 per cent in 2009 before sliding steadily to a seven-year low 5 per cent last month.

The Fed kept a lid on interest rates, which have remained astonishingly low by historical standards. The average rate on a 30-year fixed-rate mortgage remains just 3.95 per cent, compared with 6.7 per cent in June 2006. The yield on the benchmark 10-year Treasury note is 2.31 per cent, less than half the 5.22 per cent yield in June 2006.

Despite the shrunken unemployment rate, the job market remains scarred by recession: The percentage of Americans who either have a job or are looking for one is stuck near a 38-year low. One reason is that many people have just given up out of frustration.

Inflation, a bit too high in June 2006, is now disturbingly low — up just 0.2 per cent in the year to October, nowhere near the Fed’s 2 per cent target.

The real estate market has bounced back from its lows. But housing construction in October was still 41 per cent below where it was in June 2006.

Zero interest rates did fuel a surge in stock prices: The Dow Jones industrial average is up 57 per cent from the last time the Fed raised rates.

And tastes have changed, too. The iPhone has buried the BlackBerry. Gasoline prices have plummeted. Twitter has 320 million active monthly users. “American Idol,” a victim of falling ratings after the loss of stars Simon Cowell and Paula Abdul, is facing cancellation. The musical competition begins its last season in January.

Then Now

Unemployment rate4.6%5%

Labour force participation rate66.2%62.5%

30-year fixed rate mortgage6.68%3.95%

10-year Treasury note yield5.22%2.31%

Dow Jones Industrial Average11,190.8017,585.97

Median home price (of existing home sold)$229,500$219,600

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Pylas contributed from London.