Fed Funds Rate and What It Is Telling Us

Here's the History of the Fed Funds Rate since 1954.   What does it mean?  What does it tell us?

Generally speaking, it tells us the strength of the dollar over time.  In the fifties and today, the dollar is relatively strong.  In the early eighties, it was at its weakest.  When I refer to strength, I'm referring to the purchasing power in terms of the official inflation rate, not in terms of the dollar index per se.  The dollar index did not exist in 1954.  The dollar was officially pegged with gold at 35 dollars per ounce until President Nixon closed the gold window.

Note that the graph only goes as far as 2008.  At that time, the rules seemed to change.  Now, it is difficult to tell if the dollar's purchasing power is really stronger than it was in previous years.  In my opinion, the true prices of everything have been distorted through misguided economic policies.  That opinion might be disputed, but one thing cannot- the dollar in terms of gold was getting weaker until recently.  The price distortion opinion rests upon the observation that gold prices are being manipulated in order to mask the true state of affairs.

Even if one was to dispute all that, there's one thing that cannot be disputed.  The interest rate has been in a downtrend since 1982 when it peaked at near 20%.  It is now near zero.  When inflation is factored in, it is actually below zero.

During the time leading up to that date, it was in an upswing.  This rise in interest rates coincided with inflation.  Today, amongst some, there is concern about the opposite- deflation.  So far, deflation has not officially gotten into the statistics.  The threat of deflation is a boogie man invented by those who wish to see even lower interest rates.  The real threat is runaway inflation if my opinion about gold is correct.

Those lower rates lead to another unprecedented phenomenon, which is the possibility of a negative Fed Fund Rate.  If that were to happen, it most likely will lead to a disruptive impact upon savings.  Not surprisingly, the savings rate already had been going down at the same time the interest rates have been.  If it costs people to save money, which would be the case if interest rates went negative, the savings rate would plummet even further.  This would not be helpful toward economic growth.  Therefore, there are limits to how much downside there is left to the interest rates even if the lower interest rate advocates get their wish.

What goes down, must eventually come back up.  And vice versa.

Source: https://commons.wikimedia.org/wiki/File:Federal_Funds_Rate_(effective).svg