Economic News Blog
Posted by: Steven Kline, Jr. 3. March 2014

Real Fed Funds Rate Unchanged Since November 2013

The real Fed funds rate is simply the Fed funds rate minus inflation. Even though nominal rates can't go below zero, the Federal Reserve can push real rates below zero if price inflation is greater than the interest rate. Since March 2010, the real Fed funds rate has been negative because the rate of inflation has been higher than the interest rate.

According to the CPI, the annual rate of inflation, now 1.58%, in January increased for the third month in a row. Despite the slight uptick in the rate of inflation, the real Fed funds rate has been unchanged since November 2013. While the actual rate has not changed in recent months, compared to one year ago the real Fed funds rate has been increasing at a slower rate since April 2013. The slowing rate of increase in the rate should be a positive sign for the housing and durable goods industries.

The nominal rate is essentially fixed at zero by the Federal Reserve. So, the only way the real rate can change is due to a change in price inflation. The Fed would like price inflation to rise, which would lower the real rate. However, despite all of the Fed's money printing, price inflation is not hitting the Fed's target of 2.0%. Over the next year if inflation stays where it is now, then the change in real Fed funds rate will move to zero and then remain relatively flat. This means that the directional change of rates would no longer be supporting further spending on homes or durable goods.

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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