Fed Funds Rate and Inflation. Part 3

This post continues the analysis of the Fed Funds Rate’s behavior during the positive inflation surges between 1951 and 2024.²  Specifically, we look at the inflation of the 1960s.

From a photo by Giorgio Trovato on Unsplash

Introduction

The 73 years from 1951 to 2024 are divided into three types of inflationary behavior:¹

1. Significant inflation increases;
2. Significant inflation decreases;
3. No significant inflation changes.

An inflation change is significant if it is ≥4.0% with no intervening countertrend change >1.5%.

Previously, we defined the partitioning of inflation into the pattern in Table 1.

Table 1.  Timeline of Inflation Data 1951-2024 (Previously Table 2.¹)

Data

The data is from tables prepared previously.¹ 

There are 49 monthly timeline alignments:

• Fed Funds Rate and CPI Inflation months are coincident.
• Fed Funds Rate leads and lags CPI Inflation by one month (±1 month)
• Fed Funds Rate leads and lags CPI Inflation by two months (±2 months)
• …
• Fed Funds Rate leads and lags CPI Inflation by 24 months (±24 months)

Analysis

May 1959 – Dec. 1964

The decade-long inflation rise of the 1960s has been divided into two analytical parts because the first part had a slower inflation increase than the second.

Figure 1. Fed Funds Rate and Inflation May 1959 – Dec. 1964

In 1960, the Fed Funds Rate was lowered quite aggressively, while the CPI varied from no change to as much as 0.2% monthly. For the next four years, both varied within nearly similar ranges.  There was no consistent behavior of positive or negative associations.  Examples of both can be found, as well as times when the associations appear small.

Figure 2. Monthly Changes in Fed Funds Rate (x) vs. CPI Inflation (y) May 1959 – Dec. 1964

Figure 2 shows the coincident timeline data with somewhat random scattering. The trendline has a positive slope, with R = 18.6% and R² = 3.5%. This is a very weak correlation.

Figure 3.  Correlation Between Fed Funds Rate  and CPI Inflation May 1959 – Dec. 1964

The correlations are weak or negligible across the entire 48-month timeline offset range.  There is little association between changes in the Fed Funds Rate and CPI over these five plus years.

R = , R² = .

Conclusion

The conclusion will be written after the graphs for Figures 4 – 6 are added.