January 28, 2004

Free Money: the Real Fed Funds Rate

The "real" fed funds rate is the funds rate adjusted for inflation by subtracting growth in CPI from the yield on the funds rate. As I've mentioned before, CPI isn't moving because inflation is showing up in raw materials and financial assets, not in finished consumer goods. The funds rate is the rate banks charge each other to loan money overnight. The Fed can't "force" banks to loan money. But it can make it easy for them to do so. And, by effectively lowering the return on holding cash...the Fed encourages getting rid of cash into something that throws off more than a negative yield....something like say...a stock...or even a house...or two. The chart below is taken from a Cleveland Fed Report called, "Dude, Where's My Country." I'm not making that up. It's more formal name is "Economic Trends: January, 2004." You can find it here or by going to http://www.clevelandfed.org/Research/index.htm Cash, Looking Like Trash


Post a Comment

<< Home