CPI Index V Inflation and FED Funds Rates

The neutral rate of interest in 2016 was 1.64, 1.07 in 2017 and negative 4.91 in December 2021. With the Inflation rise to 8%, the neutral rate stands at -5.53. Inflation historically and economically must share an opposite correlation to Fed Funds.
The Fed funds rate since about 1920’s inception achieved its highest rate at 19.10 in 1981 under Volker as Fed chairman. This places the Fed Funds average at around 9.7 and the neutral rate at 1.2 from 8.5.

Since May 2007, Fed Funds achieved highs at 5.25 and the 2007 neutral rate at 3.15 to 0.95 as Inflation rates tracked higher from 2.1 to 4.3. The Inflation rate held an average at 3.2 while Fed Funds averaged 4.23 and 206.21 for the CPI Index. Inflation rates tracked higher, Fed Funds lower and higher for the CPI index.

The CPI index contained a deviation of almost 4 points, just above 1 point for Inflation and under 1 point for the Fed Funds rate.

By 2008, the CPI index rose from 211 to 219, Inflation rates dropped from 4.3 to 0.1 and Fed Funds radically dropped from 4.27 to 0.09. The neutral rate remained deeply negative. The Fed Funds to Inflation relationship held a 1 and 2 point deviation against a 4 point deviation to the CPI index.

2021 CPI Index rose from 261 to 278, Inflation 1.4 to 7.0 and a deviated relationship from 8 to almost 3 points for Inflation. Fed Funds from 0.02 was erased from the CPI Index to Inflation rate equation.

January 1981 Inflation achieved 11%. As the CPI index January 1981 achieved 87.0 lows and rose to 94.0 by December, the Inflation rate subsided to 8.9%. Fed Funds dropped from 22% to 11%.

CPI maintained a 4 point deviation, Inflation 1.5 and a whopping 5 points to Fed Funds.

The Inflation rate to the CPI Index is a solid relationship historically and lives prominently to this very day by Inflation rate divide CPI. The CPI Index rose from 2019 to 2022 from 251 to 287 historic highs in 2022 since the 1913 inception while Inflation rates tracked from 1.2 lows to to now 8.5%.

The driving force is the CPI Index as the determination to Inflation rates. While Fed funds shares a 1 and 2 point relationship to Inflation rates and a 2 to 4 point relationship to the CPI Index, Fed Funds appears absent to the support in the CPI vs Inflation rate equation. Current interest and neutral are so low, Fed Funds factors to no role played in the CPI Vs Inflation rate scenario since at least 2019.

Powell’s view to Fed Funds is to beat averages at 1.23 and next at 2.65 then resolve a negative neutral rate at 5.85.

Brian Twomey

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