Economic News Blog
Posted by: Steven Kline, Jr. 25. July 2014

Real Fed Funds Rate Unchanged in June

The real Fed Funds rate was -1.46% in June 2014. This is the lowest the real rate has been since September 2013, but they rate was only marginally lower than last month. This is the third month in a row that the real rate has slowly fallen. However, the real rate has fluctuated in a very narrow band since September 2013 and has not changed significantly since April 2013.

The year-over-year change in the Fed funds rate ticked up for the first time since April 2013. In June 2014, the real rate was just 11 basis points higher than it was one year ago. The rate of change was just 1 basis point higher than it was last month. The rate of change has been virtually flat the last three months.

If the nominal Fed funds rate says where it is currently and the rate of inflation remains at roughly 2% (it's been slightly higher than that the last two months), then the change in the real Fed funds rate will remain flat through August then accelerate lower through the first quarter of 2015. This would provide a boost to consumer durable goods spending and housing. Real interest rates tend to lead housing by about 12 months and consumer durable goods spending by about 15 months.

However, the Federal Reserve has hinted at rate hikes coming earlier than most people believe. This could just be talk, but if the Fed funds rate starts rising it will the positive effect of lower rates through next spring.

The real Fed funds rate is an important leading indicator for the following industries: appliancesautomotivecustom processorsfurniture manufacturinghardwareHVACmetalcutting job shopsoff-road/construction machinerypetrochemical processorsplastics/rubberpumps/valves/plumbing productstextiles/clothing/leather goods; and wood/paper.

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