Economic News Blog
Posted by: Steven Kline, Jr. 24. September 2013

Year Over Year Real Fed Funds Rate Continues to Drop

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.

The annual rate of inflation in August fell to its lowest rate since May 2013. Therefore, the real Fed funds rate was unchanged at 162 basis points. The real rate has been virtually unchanged since March 2013. Year over year, the real Fed funds rate continues to increase at a slower rate. If inflation remains stable then the real Fed funds rate will continue to increase at a slower rate through March 2014. But, in order for the change in the real rate to go negative, inflation will have to pick up significantly. A negative change in real rates tends to be a very positive sign for durable goods manufacturing and capital equipment spending.

The Fed funds rate is an important leading indicator for the following industries: appliances; automotive; custom processors; furniture manufacturing; hardware; HVAC; metalcutting job shops; off-road and construction machinery; petrochemical processors; plastics and rubber; pumps, valves, and plumbing products; textiles, clothing, and leather goods; and wood and paper.


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