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Getting back to normal? Part 2

Are real interest rates trending down to "normal"?

In our previous post, we mentioned that the Federal Open Market Committee (FOMC) is trying to normalize interest rates by gradually increasing the target for the federal funds rate. But what is the “normal” interest rate? Some people are arguing that it’s actually lower than what it has been before. One way to try to identify this normal state is by looking at long-term trends in interest rates: Presumably, long-term forces are what move the normal level of interest rates. (In contrast, interest rates respond in the short term to economic fluctuations rather than trends.) So we’ve graphed three popular interest rates that have a longer time series: the 1-year Treasury bond rate, Moody’s Aaa corporate bond rate, and the federal funds rate.

Can you see a trend? Of course, you can. There’s a trend increase until the end of the 1970s and then a trend decrease. And, of course, this has to do with the history of inflation. This is why people tend to discuss trends in real interest rates without the inflation component. But it’s not perfectly clear how to determine that inflation component: Indeed, interest rates are driven by markets and what they think inflation will be over the life of the bond or the period of credit. The data we have cover past inflation. While past and future inflation may be correlated, they’re not the same thing. Over the longer run, however, using realized inflation as a proxy for expected inflation works reasonably well, with exceptions. So we move to the second graph, where we’ve taken the same three interest rates and subtracted the CPI inflation rate from each. Do we see a downward trend? It looks like there’s one from 1980 to the Great Recession. After that, it’s subject to debate.

How these graphs were created: For the first graph, search for “1- year treasury rate” and take the monthly, constant maturity series. Then from the “Edit Graph” section, use the “Add Line” option and search for and add “aaa” and then also “fed funds rate,” each time taking the monthly rate. Finally, start the graph in 1955. For the second graph, repeat this process for each line: search for and add “CPI,” modify its units to “Percent Change from Year Ago,” and apply formula a-b.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: AAA, CPIAUCSL, FEDFUNDS, GS1

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

The state of education…or, rather, the education of states

GeoFRED can help us track aspects of education, which can vary significantly among U.S. states. This map shows the fraction of those 25 years or older who have completed a bachelor’s degree. The data are from 2012 (the last year the Census Bureau published such statistics) for the 50 states plus Washington, DC. Darker shades represent a higher fraction of those with a bachelor’s degree.

Clearly, there are large disparities in educational attainment: Our nation’s capital takes the cake, with 53% of residents 25 years or older having completed a bachelor’s degree. As for the states, Massachusetts tops the list with 39.3%, while Mississippi is at the other end of the spectrum with 20.7%.

States with a larger share of college graduates seem to cluster on the northeast coast (e.g., New York has 33.4%) and the west coast (e.g., Washington has 31.7%). States with lower educational attainment form a crescent shape from the Great Lakes to the Gulf of Mexico. Colorado is an exception, with 37.5% despite its distance from the coasts; it’s second only to Massachusetts.

How this map was created: From GeoFRED, after clicking on “Build New Map,” go to the “Tools” menu. Select “State” under “Region Type” and search for “People 25 Years and Over Who Have Completed a Bachelor’s Degree.” Under “Edit Legend,” choose four color classes; under “Choose Colors,” use whichever color scheme you prefer.

Suggested by Ana Maria Santacreu and Heting Zhu.

View on FRED, series used in this post: GCT1502AK, GCT1502US, GCT1502WY


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