Long Term Perspective

The real (inflation-adjusted) rate of interest indicates the degree of constraint in the financial market. In this case, the federal funds rate (controlled by the Fed) is compared to the yearly change in the PCE (personal consumption expenditure) deflator. When the PCE deflator and the fed funds rate were equal in 1992, it signaled an accommodative policy stance. As the gap widened in the 1990s, it meant that monetary policy grew more restrictive. This is not unusual during an economic expansion, however.

Short Term Perspective

The Fed left rates unchanged at the FOMC meeting on November 15. Financial market participants expect the Fed to shift to a neutral bias at the December 19 meeting from its current stance, which has "heightened inflation risk" bias. Market players are hoping that the Fed will reduce the federal funds rate target in early 2001.