Real Fed Funds Rate Falling Faster

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 inflation has been higher than the interest rate.

The annual rate of inflation has increased the last three months, nearly doubling to 1.96% from 1.06%. This is the second highest rate of annual inflation since October 2012. This has helped push the the real Fed funds rate lower for the third month in a row, although the change is only 8 basis points (or 0.08%) over that time. Compared to one year ago, the change in the real Fed funds rate has increased at a slower rate the last three months. In other words, it is falling faster. The rate of increase is now at the slowest rate since November 2012. In the short term, this is a positive sign for durable goods production and capital equipment investment in 2014 and 2015. However, a healthy economy would not see negative real rates.

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.