The Fed May Be Tightening By Just Standing Still

With the federal funds rate relatively stable since May, many economists chastise the Federal Reserve for failing to ease in the face of a faltering economy. And those who think it is real interest rates rather than nominal rates that count claim that the Fed has, in effect, been tightening by standing still. Because inflation has slowed since May, argues Robert Brusca of Nikko Securities Co. International, the real federal funds rate has actually risen from 0.75% to 2.1%. Just how tight is that from a historical perspective? Brusca notes that the real federal funds rate averaged a negative -2.0% at the end of four of the past five recessions.

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