Interest Rates and Inflation: Back to Fundamentals

摘要

The U.S. Federal Reserve Bank is moving from easy to tight money. How far will this go, and what are the likely impacts on PCBs and information technology (IT)? Figure 1 shows a key short-term interest rate—the federal funds rate—and a common measure of inflation: the annual-ized change in the Consumer Price Index (CPI). The relationship between these series is more regular than the level of either series. On average, the federal funds rate moves about two (2) percentage points above inflation. Something radical happened in late 2002, however. The federal funds rate plummeted to around 1 percent, crossing the inflation curve, which ran around 2 to 3 percent. The reason, of course, was that the Fed was trying to jump-start the economic recovery.