US inflation → Fed funds rate

Common explanation (Cause · same direction): When inflation is above target, the central bank raises rates to cool demand.

This issue: US inflation at 64 (warm), Fed funds rate at 72 (warm) — both above normal, in line with the common explanation.

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

US inflation: 0.41 percentage points above its 10-year average. Fed funds rate: 1.31 percentage points above its 10-year average.

Tests

Does this link hold up?

Common explanationWhen inflation is above target, the central bank raises rates to cool demandSource: Federal Reserve Board, “Monetary Policy: What Are Its Goals? How Does It Work?” (2021).
Tested against our dataAgreement between the positions of US inflation and Fed funds rate (6-month lag), measured in the direction of the common explanation: +0.53. Looking at every 5-year period (shifted one year at a time), the two moved in that direction in 37 of 48. Supported by the data
Periods when it did not holdAcross 48 5-year periods, out of step in 1982⁠–⁠1995, 1996⁠–⁠2001, 2003⁠–⁠2008 and 2009⁠–⁠2016.

History

The two lines, overlaid

Data: US: Bureau of Labor Statistics, via FRED (Federal Reserve Bank of St. Louis); Japan: World Bank Global Economic Monitor (CC BY 4.0); others: OECD; Federal Reserve H.15, via FRED (Federal Reserve Bank of St. Louis). Positions: our calculation.

US inflationFed funds rate

Time lag

At what lag do they match best?

Longer bar = moves more in the direction of the common explanation (the number is the agreement).

same month+0.53
3-month lag+0.54
6-month lag+0.53
9-month lag+0.51
12-month lag+0.47
18-month lag+0.38

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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