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Time aggregation in FRED

In many instances, statistics are collected at a higher frequency than a user requires. In the example here, the unemployment rate is collected monthly, but we often have other labor market data collected annually. The question here is how to aggregate the high-frequency data into a lower-frequency statistic. In FRED, we have three options: average, sum, or end of period. In the graph, we compare annual unemployment data taking either the average over the year or the end-of-period observation. The choice of whether to use seasonal adjustment doesn’t affect the average. By definition, seasonal adjustment implies that December, the last month of the year, does not have a systematically different unemployment rate from any other month. However, averaging or summing will systematically give lower measures of variation than the end-of-period observation. The reason is simple, even without too much formal math: Suppose every month our observation is the annual number plus some monthly “noise” term. Either summing or taking the average, we essentially allow these monthly variations to cancel each other out. Taking an observation from the end of period includes all of the month-specific variation. In the graph, we can see that the red line, which takes annual unemployment as the final month’s observation, is more volatile. In fact, from 1979-2014, its coefficient of variation is 25.56%; the blue line, which takes the average, has a coefficient of variation of 24.86%.

How this graph was created: Search for “unemployment” and select the seasonally adjusted civilian unemployment rate. Using the pull-down menu, change “Frequency” to “Annual.” The default “Aggregation Method” is “Average,” and we will keep that. Then, “Add Data Series” and again search for “unemployment.” Add a new series using “unrate,” the same data as last time. Again, change it to an annual frequency. But this time, change the aggregation method to “End of Period.”

Suggested by David Wiczer.

View on FRED, series used in this post: UNRATE

Federal funds rate: target vs. reality

The traditional policy tool of the Fed is to target the federal funds rate. Note the term target. Indeed, the Fed does not set this interest rate; rather, it sets the target and then conducts open market operations so that the overnight interest rate on funds deposited by banks at the Fed reaches that target. Obviously, reaching the target is sometimes harder to do, especially in times when there’s a lot of uncertainty in the markets. The graph above compares the target (or target band more recently) with the effective federal funds rate. While the two coincide quite well over most of the 10-year period, there are important deviations that correspond to various financial market events. Nevertheless, these deviations are short-lived, which shows that the open market operations do have the desired effect.

How this graph was created: Search for “federal funds rate” and these four series should be among the top choices. Select the daily rates and use the “Add to graph” button to add them to the graph.

Suggested by Christian Zimmermann

View on FRED, series used in this post: DFEDTAR, DFEDTARL, DFEDTARU, DFF

The many faces of the federal funds rate

It’s no surprise FRED has federal funds rate data. But these data aren’t as simple as you may think. They have changed form over time as the Federal Open Market Committee has changed the way it sets the funds rate: From 1982 through 2008, the target rate is a discrete number. For example, it is 9.5% on Oct. 1, 1982, 3% on Oct. 1, 1992, and 1.75% on Oct. 1, 2002. At the end of 2008 (i.e., since the financial crisis), the FOMC began setting a target range of 0.00 to 0.25%. And, to further complicate matters, the data prior to 1994 come from the working paper “A New Federal Funds Rate Target Series: September 27, 1982 – December 31, 1993,” making it an altogether different series.

The discrete-target funds rate for 1982-2008 is DFEDTAR in FRED. The target-range funds rate since then has a lower and upper bound—DFEDTARL and DFEDTARU, respectively.

Of course, FRED will continue to accommodate changes to the funds rate. As the U.S. economy overall and employment specifically have recovered, the FOMC has signaled a need to respond by changing the rate. And financial observers around the globe are anxious about how the FOMC will respond. If at some point in the future the FOMC moves from a target range to a discrete target, FRED will also need to respond: In this case, the FRED team plans to change the lower-bound and upper-bound series to a commensurate data point to solve this issue. This method will ensure that the history of the range remains intact, while allowing FRED users to present the data in the simplest way possible. We will not combine the series, create a new series, or update the DFEDTAR series.

How to make this graph: The FRED Team prefers to present these data by creating one graph with the three aforementioned series. First search for and add DFEDTAR to a graph. Next use the “Add Data Series” menu below the graph to search for DFEDTARL and DFEDTARU in the field that asks you to “Type keywords to search for data.” Select these series and add them to the graph with the “Add Series” button.

Suggested by Travis May.

View on FRED, series used in this post: DFEDTAR, DFEDTARL, DFEDTARU

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