Economic News Blog
Posted by: Steven Kline, Jr. 18. March 2014

Real Fed Funds Rate Highest Since August 2010

The real Fed Funds rate was -1.32% in February. This is the highest the rate has been since August 2010. Generally, the rate has been moving higher since February 2012. The year-over-year change in the Fed funds rate has been falling (moving up on the chart below) since April 2013. This trend in rates should provide a temporary boost to the housing market and the market for durable goods purchased with debt. 

However, it is unlikely that the change in the Fed funds rate will push into negative territory (that is, the rate dropping from where it was one year ago). This is because the Fed funds rate is essentially zero (and won't change for some time according to the Fed) and the rate of inflation is not increasing, which would help drive down the real Fed funds rate. In fact, the annual rate of inflation according to the CPI is just 1.13%, which is the third lowest rate since June 2010. In other words, based on the official rate of inflation, the Fed has been unable to increase price inflation despite all of its money printing. Unless the rate of inflation begins to increase, the change in the real Fed funds rate will begin to stagnate in the next couple of months. Therefore, the trend in interest rates will no longer be supportive of increased spending in the housing and durable goods markets.

The Fed funds rate is an important leading indicator for the following industries: appliances; automotivecustom processorsfurniture manufacturinghardwareHVACmetalcutting job shopsoff-road and construction machinerypetrochemical processorsplastics and rubber; pumps, valves, and plumbing productstextiles, clothing, and leather goods; and wood and paper.

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