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Getting back to normal? Normalization of the federal funds rate may not look so normal


This FRED graph shows the federal funds rate for approximately the past 10 years. This is the interest rate that the Federal Open Market Committee (FOMC) targets. It’s easy to see that this interest rate has been low for most of the period shown here. But lately it’s been soaring. Or so it seems.

The FOMC is currently pursuing a policy of normalization: They’re getting the federal funds rate back to “normal.” Of course, in the graph above, the rate doesn’t look anything like normal. One has to keep in mind, however, that monetary policy has been exceptional (that is, not very normal) for the past ten years. Interest rates have been low like never before. Actually, they’ve been very close to zero for a long period. So long, in fact, that some young adults have never witnessed higher interest rates. But if you play with the the slider at the bottom of the graph to expand the time range, it quickly becomes obvious how exceptional this recent period has been and how far we still are from “normal” interest rates. Except for the period around 2003, one has to go all the way back to 1961 to find a rate as low as the current 1.5%.

How this graph was created: Search for “federal funds rate,” take the monthly series, and restrict the graph to start on 2008-12-01.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: FEDFUNDS


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