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. The gap narrowed in 2001 as the Fed eased aggressively in order to spur economic activity.

Short Term Perspective
The Fed shocked market players by reducing the federal funds rate target by 50 basis points on November 6. They shifted back to a neutral bias, suggesting that they are done cutting rates in this cycle. No policy changes are expected at the December 10th meeting. The spread between the funds rate and the PCE deflator was negative in September and zero in October - signaling a rather accommodative policy for this stage of the business cycle.