The Fed Has Been Tightening

If you’re curious about why the Federal Reserve did what it did last week (and it caught me off guard as well), this chart might shed some light. This is the real effective Fed funds rate, meaning it’s the overnight interest rate set by the Federal Reserve adjusted for inflation.

As you can see, the real Fed funds rate has been rising in the past year. Of course, it’s gone from negative numbers to less negative numbers but the effect has been a tightening from the Fed. Interest rates have stayed where they are, but inflation (and this is headline CPI, not core) has trended downward. When rates stay the same and there’s disinflation, that’s an increase in real rates.

Posted by on September 18th, 2012 at 12:46 pm


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