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Rates related to monetary policy

The fed funds rate stays between the discount rate and the reverse repo rate

Different interest rates are involved in the monetary policy process: The federal funds rate (FFR) gets most of the news headlines, but deeper reporting refers to the interest rate on reserve balances (IORB) and the discount rate, as well as something called the overnight reverse repurchase agreement (ON RRP) rate. At first glance, the relationship among these rates might be difficult to parse; so let’s take a moment to sort it out.

The target range for the effective FFR is set by the FOMC, while other rates tend to be determined by market forces. Rather than set an exact number, the FOMC sets a range and aims to keep the effective FFR in that range.

To help maintain the rate in this target range, the Board of Governors sets the IORB rate and the FOMC sets the ON RRP Rate to nudge the FFR up or down within the range. More information on these rates can be found in this FRED Blog post by Jane Ihrig and Scott Wolla.

The Discount Window is a facility through which banks can borrow directly from the Fed—typically as a last resort for banks that weren’t able to borrow from other banks or had insufficient cash on hand. The primary credit rate (often referred to as the discount rate) is the rate banks pay for borrowing from the Fed, a rate set by each Bank’s board of directors. It’s unlikely banks would borrow at higher market rates if they could borrow from their Federal Reserve Bank, which makes the discount rate an effective ceiling on the FFR target range.

The ON RRP rate, on the other hand, serves as a floor for the FFR as financial institutions (theoretically) wouldn’t lend funds for a rate below the ON RRP rate, since they would be able to earn a higher and risk-free interest by putting their money at the Federal Reserve instead of loaning it out. The above FRED shows that the FFR stays between the discount rate and the ON RRP.

Find more information on the relationship between these tools in this Page One Economics essay also by Jane Ihrig and Scott Wolla.

How this graph was created: Search FRED for federal funds rate and select the daily federal funds effective rate series. From the “Edit Graph” panel, search for and select “IORB.” Repeat for “Overnight Reverse Repurchase Agreements Award Rate” and “Discount Window Primary Credit Rate.” Restrict the date range to the past year.

Suggested by Jack Fuller and Nathan Jefferson.

Understanding real, per capita personal consumption expenditures

Economics studies what is produced, how, and for whom, but always under the assumption that the desire to consume goods and services motivates work and trade. Real, per capita consumption is often the most informative consumption measure because it adjusts for inflation and population growth. Total nominal consumption would tend to rise as the price level or population rises, even if individuals aren’t consuming more.

The FRED graph above shows that real, per capita consumption and each of its components—durable goods, nondurable goods, and services— have risen consistently over the long run, except for short retrenchments during recessions. It shows that average American consumption is more than 4.5 times as great at the end of 2023 than in 1950.*

In addition to these long-run trends and retrenchments during recessions, the first graph shows that consumption was unusually volatile during the COVID-19 pandemic. Total consumption and service consumption declined substantially, but there were seemingly less-pronounced movements in consumption of durable and nondurable goods. Unfortunately, the differences in scale among the four measures of consumption make it difficult to see relative changes in consumption expenditures.

The second FRED graph helps us see relative changes in real expenditures in these three components of consumption, which are normalized by dividing each by total consumption. There’s a definite decline in the share of nondurable goods consumption over the whole sample, as well as a large increase in the share of durable goods consumption. The share of service consumption is more complex: It rises from the 1940s to the early 1990s and then declines. Service consumption is also unusual in that the share of service consumption has often risen during recessions.

Consumption patterns change according to consumer preferences, technology, income changes, and credit availability. Chien (2015) shows that using nominal shares of service consumption, rather than real service consumption, indicates a fairly pronounced and steady rise in service consumption. In other words, a rise in the relative price of services drove much of the rise in service consumption. The reason service prices rose relative to nondurables or (especially) durables is that productivity increases were faster for manufactured goods (durables and nondurables) than for services. That is, technological advances improved our ability to make televisions, computers, and cars much more than they improved our ability to provide medical exams, give college lectures, or babysit children.

Finally, to better see the behavior of relative consumption around the COVID recession of 2020, our last FRED graph illustrates real, per capita expenditures from the first quarter of 2019 through the first quarter of 2021, with each series normalized to take the value 100 in the first quarter of 2020. During this episode, service consumption declined substantially, while consumption of nondurables declined modestly, and consumption of durables stayed steady. It’s easy to understand that consumers’ desires to avoid services (i.e., human contact for restaurant meals or massages) would reduce service consumption during COVID. If people aren’t going out, they might also postpone purchases of some nondurables, such as clothing and footwear. Finally, people stuck at home will still want entertainment, so purchases of computers, televisions, and durable exercise equipment remained fairly steady.

*Examples of durable goods are vehicles, furniture, computers, and software. Some non-durables are paper and plastic products, clothing, footwear, and food. Services include entertainment, healthcare, auto repairs, landscaping, and babysitting.

How these graphs were created:
First graph: Search FRED for and select “Real personal consumption expenditures per capita.” From the “Edit Graph” panel, open the “Add Line” tab to search for and select “Real personal consumption expenditures per capita: Goods: Nondurable goods.” Repeat for “Real personal consumption expenditures per capita: Goods: Durable goods” and “Real personal consumption expenditures per capita: Services.”
Second graph: From the first graph, use the “Edit Graph” panel’s “Edit line 2”: Under “Customize data” search for and select “Real personal consumption expenditures per capita” and apply formula a/b. Repeat for lines 3 and 4. Finally, click on “Edit line 1” and delete it.
Third graph: Start from the first. From the “Edit Graph” panel and then “Edit line 2,” select “Index (Scale value to 100 for chosen date or recession)” In the “units” box and select “US recession” with “2020-02-01 Start.” Select “Copy to all” to the right of the units selection. Click on “Edit line 1” and delete it. Above the graph, select “2019-01-01” and “2021-01-01″ as the sample dates.

Suggested by Christopher Neely.

Saving for retirement

Tracking the growth in IRA balances

The FRED Blog has discussed the growth of 529 saving plans to pay for college expenses. Because withdrawals became tax-exempt in 2001, their value soared. Today we discuss another type of saving plan with tax benefits: individual retirement arrangements (IRA) plans.

The FRED graph above shows data from the Board of Governors of the Federal Reserve System reporting the dollar value of savings held in tax-advantaged retirement plans:

  • IRA accounts: This is the generic name of a whole family of retirement plans. In some plans, the contributions are tax-exempt and in others it is the withdrawals that are tax-exempt.
  • Keogh accounts: This is a seldom-used name for retirement plans for those who are self-employed.  Like 529 saving plans, their name is associated with the federal law that codified them.

The data in the graph have been adjusted for consumer price inflation to accurately compare their change over time. Notice how, between 1984 and 1991, the value of individual retirement accounts increased by $884 billion, or 146%. That’s more than double in 7 years.

Also notice the bump in the value of all IRA accounts during 2020, the onset of the COVID-19 pandemic. At that time, the US Congress granted additional tax benefits to unplanned, albeit temporary, withdrawals. However, since saving is the difference between income and spending, reduced spending during those uncertain times resulted in fast growth in overall retirement saving account balances. And these remained elevated for quite some time afterward. Learn more about excess savings from Masataka Mori and Juan M. Sánchez.

How this graph wase created: Search FRED for and select “IRA and Keogh Accounts: Total.” From the “Edit Graph” panel, select the “Line 1” tab to customize the data. Start by searching for “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average.” Click on “Add” and then type the formula (a/b)*100. Last, use the “Format” tab to select “Graph type: Bar.”

Suggested by Diego Mendez-Carbajo.

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