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Real Fed Funds Rate Increases for 2nd Month
The falling rate of inflation has led to real Fed funds rate moving higher for the second month in a row. However, the year-over-year change in the rate has fallen since April 2013.
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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, now 0.96%, in October fell to its lowest rate since October 2009. The falling rate of inflation has led to real Fed funds rate moving higher for the second month in a row. However, the year-over-year change in the rate has fallen since April 2013. If the real rate remains unchanged, as it has generally has since March 2013, the year-over-year change will continue to fall through early next year. But, the change in th real rate will not go negative unless the rate of inflation picks up. A negative change in real rates tends to be a very positive sign for durable goods manufacturing and capital equipment spending. I think this makes it likely that the Fed will continue and/or increase quantitative easing in 2014.
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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