Financial conditions are loose even as the real funds rate peaks
The real fed funds rate, defined as the fed funds rate less the PCE deflator measure of inflation, stands at 2.9%, the highest in nearly 17 years.
Normally, that should be concerning. But there are mitigating factors, driven by the very market optimism that has created an easing of financial conditions by the Fed’s own measure to a level not seen since January 2022,
when rates were effectively at zero and there was still a passionate debate over whether inflation was transitory
Somehow, the Fed’s most aggressive hiking cycle in decades has left us where we started — which doesn’t make much sense.
John Authers Bloomberg 4 april 2024
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