Federal Reserve Economic Data

Inflation is at a 40-year high—as measured by either the consumer price index or the personal consumption expenditures price index.

Federal Reserve officials have long believed that controlling inflation is a necessary condition for achieving the Congressional mandates of price stability and maximum employment. Implicit in this belief is the view that high inflation—particularly if it’s unexpected—imposes a broad array of economic costs on the economy.

For example, parts of the U.S. tax code are not annually adjusted for inflation. Inflation is a tax on cash balances. And high inflation can worsen uncertainty about future interest rates, which tends to raise financial market volatility and lower prices for financial assets such as stocks and bonds. In short, high inflation reduces the efficient allocation of resources in a market economy.

The Great Inflation, from the late 1960s to the early 1980s, was a prime example of the corrosive effects of high inflation. U.S. inflation rose sharply, as did the unemployment rate; but it also became much more volatile. High and volatile inflation meant the FOMC was never sure in real time if a decline in inflation was temporary or longer lasting. These distorted inflation signals contributed to the “stop-go” policy of the 1970s, including the tendency to ease policy when inflation fell. But inflation did not return to its previous rate. It rebounded rapidly and eventually rose to more than 14% in 1980. This turbulence increased the volatility of real GDP growth as well.

The FRED graph above shows four recessions in about a dozen years—roughly every three years beginning with the 1970-71 recession and ending with the 1981-82 recession. Until the 2007-09 recession, the 1973-75 and 1981-82 recessions had been the deepest in the post-WWII period. Also, there was a sharp slowing in labor productivity growth around 1973 that lasted for 20 years, until the microchip-led productivity boom commenced around 1994.

There were many factors that led to the Great Inflation—both bad luck and bad policies:

• oil and commodity price shocks that reduced aggregate supply
• rising transfer payments that helped boost aggregate demand
• the imposition (and subsequent loosening) of price controls imposed after the Camp David meeting in 1971

However, as former Federal Reserve Chairman Paul Volcker demonstrated early in his tenure, one key ingredient that was lacking during the Great Inflation was a commitment to restore price stability.

How this graph was created: Search for and select the CPI series in FRED. Restrict the sample period to 1966-01-01 to 1982-12-10 with the date picker above the graph, the slider below the graph, or your mouse (by highlighting the period you want in the graph itself. From the “Edit Graph” panel, change the units to “Percentage change from year ago.”

Suggested by Kevin Kliesen.

It’s natural to want to know where you stand in the economy and get ahead of any big changes. It’s no surprise, then, that we’re hearing plenty of talk about whether the U.S. economy is in a recession.

As usual, we begin our inquiry with FRED data! The graph above displays, month after month, the estimated probabilities that the U.S. economy is in recession. These estimates are calculated from a set of economic statistics discussed in this article. The FRED graph also conveniently displays shaded bars when actual recessions occurred, as determined by the NBER business cycle dating committee. And the match up is astonishingly good! (For a deeper analysis, see this article.)

So, are we in a recession or not? You can judge for yourself; but at the time of this writing, the June 2022 data do not seem to indicate a recession.

Keep in mind that economic data can take a little while to arrive, conditions can quickly change, and our current economic situation is certainly different from previous ones. Thus, we can’t exclude the possibility that the model may be off target this time, but we can consider our own sense of the probability of that being true.

How this graph was created: Search FRED for “recession probabilities.”

Suggested by Christian Zimmermann.

The euro hit “parity” with the U.S. dollar for the first time in nearly 20 years on Wednesday, July 13, 2022. That is, the exchange rate dropped to $1.00 per euro. It quickly rebounded and has been hovering around $1.02 at of the time of this writing. What are the forces behind these changes, and how might we use data to illustrate them?

Interest rate parity theory suggests that the interest rate in the U.S. should equal the interest rate in the eurozone, plus the expected depreciation of U.S. currency. The basic assumption underlying this theory is that there is no arbitrage between deposits in different currencies. Thus, if interest rates are higher in the U.S. than in the eurozone, then it has to be the case that the dollar will eventually depreciate (i.e., lose value) vis-à-vis the euro. If markets are expecting the U.S. dollar to depreciate tomorrow, today’s value tends to be high. Thus, exchange rates tend to broadly follow movements in the difference between interest rates.

We see in the FRED graph above that, especially in the more recent period, the dollar-to-euro spot exchange rate tends to fall when the difference between the federal funds rate and the ECB deposit rate is positive. When this exchange rate is lower, the dollar is more valuable relative to the euro.

What does the lower exchange rate mean for U.S. consumers? The lower exchange rate, or the stronger dollar, will allow holders of U.S. currency to get more euros, and thus products in Europe are cheaper than usual. Typically, a strong domestic currency is good for consumers because importing products is cheaper; but it’s bad for domestic producers because international customers have to pay more for domestic exports.

How this graph was created: We take the first line as the federal funds rate (FEDFUNDS), click on “Edit Graph,” add the series for the European central bank rate for the euro area (ECBDFR), and apply the formula a-b. Then add a second line in the “Add Line” tab and put in the dollar-euro spot exchange rate (DEXUSEU) and change this line to the right axis in the “Format” tab.

Suggested by Miguel Faria-e-Castro and Samuel Jordan-Wood.