Inflation and the Fed rate decisions between 1954 and 2024. Should we expect recession?

Abstract

A strict linear proportionality between the CPI inflation and the actual interest rate defined by the Board of Governors of the Federal Reserve System is studied. During the last 70 years, the cumulative CPI is just the cumulative interest rate  times 1.37. There are periods when the Fed interest rate deviates from the long term inflation trend driven by the CPI. In this paper, we use the observational dataset provided by the Economic Resources & Data  of the Federal Reserve Bank of St. Louis. The difference between the cumulative curves of the CPI and the Fed rate divided by 1.37 is periodic. The recessions observed after 1955 are well synchronized with the kinks and turns in the difference curve. The most recent recession as related to the peak in the difference was expected in 2020, but was likely mixed with the COVID-19 induced recession. The current Fed rate is not high enough to return the difference to the zero line in before 2030-2040.

 

Observations

The CPI and the Federal Funds effective rate data between 1954 and 2024 are available from the Economic Resources & Data of the Federal Reserve Bank of St. Louis [1]. In Figure 1, we depict the effective rate, R, and the monthly estimate of the consumer price inflation, CPI, for the previous 12 months (not seasonally adjusted). One can see that R lags behind the CPI since 1980, i.e., inflation grows at its own rate and R has to follow up. The idea of interest rate is that a higher R should suppress price inflation when it is high due to the effect of expensive money. During the low inflation or deflationary periods with slow economy, low (in some countries negative) R has to channel cheap money into the economic growth. The reaction of inflation is also expected not immediately but with some time lag.

 

Therefore, the idea of the Fed rate influence on the consumer price inflation is based on some cumulative effect of the change in money price for the economy. It would be instructive to look into the cumulative curves of both the CPI and the Fed rate in an attempt to confirm the influence of the latter on the former parameter. The cumulative influence of the interest rate should produce a desired effect in the long run and inflation should go in the direction towards the values acceptable for the FRS. Figure 2 displays the cumulative curves of the monthly estimates of R and CPI. At first glance, both curves are very similar and evolve in sync but at different rates, i.e., with different slopes.

 

We have estimated the best coefficient to fit both curves as 1.37 (interestingly, this is similar to the fine structure constant α=137 in physics). Figure 3 displays the resulting curves. We have added vertical lines to present the recession periods as reported by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee [2]. This is an intriguing plot. In the long run, the R curve fluctuates around the CPI one and returns to it. (We consider CPI as an independent endogenous economic variable.)

 

Finally, Figure 4 presents the difference between the cumulative curves. Most recently, this difference peaks in March 2023 and then slightly falls. This peak was expected and is a genuine reaction of the Fed to the dramatic surge in inflation during and after the pandemic. The money pumping into the economy was extraordinary, and money devaluation was a natural reaction. The peak in the difference in March 2023 was 3 quarters after the technical recession: two subsequent quarters with negative growth rates in Q1 and Q2 2022. If to consider the Fed behavior as based on rules and precedents, one can expect that the positive deviation between the inflation and the Fed rate curves has to be closed within the next 20 years. The Fed rate has to be higher than CPI inflation times 1.37.  

 

Figure 1. The monthly estimates of the Federal Funds effective rate, R, the rate of consumer price inflation, CPI, between July 1954 and August 2024.

 

Figure 2. Cumulative values of the two curves in Figure 1.

 The broader picture in Figure 4 is even more interesting to discuss in details. Firstly, the difference is very close to periodic behavior. The previous peak was near 1980, i.e., ~45 years ago.  The previous trough was observed in the beginning of 2000s. The amplitudes of the peaks and troughs are similar: from 1.8 in 1980 to 2.0 for the most recent. The amplitude of the latter could be an artifact of the longer zero-Fed-rate policy during the very slow recovery after the 2008 recession and the COVID-19 pandemic.

When looking into the recession periods observed since 1955 and comparing them with the kinks and turns in the CPI-Fed rate difference in Figure 4 one may have an impression that the former are most often coincide with the latter. The only important exclusion is that the 2023 peak was not marked any recession. The 2020 recession is exogenous and fully related to the COVID-19 pandemic. Or not? Can it be that the peak in 2023 is not linked to a new recession, but the 2020 recession was forced by the expected 2020 CPI-Fed rate peak smashed by the Fed actions forced by COVID-19?

 

Figure 3. Same as in Figure 2, but R is divided by 1.37. Vertical lines present the recession periods as reported by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee.

 

 

Figure 4. The difference between the CPI and R curves in Figure 3.

The 2023 peak was artificially high, but it has to be followed by a fast fall in the difference. With high inflation in 2022-2023 the Fed rate has to be high as well. It seems this rate was not high enough to suppress inflation in sense the lower and earlier peak in the difference and further drop according to the slope observed in the 1980s. With the Fed decision to quickly reduce the interest rate in the next 4 to 6 quarters, one can expect that the difference will not be falling at all. The effect of high difference during extended periods is not clear, but the difference has to come back to the zero line at some point in the next 10 to 15 years. One needs to follow these phenomena.

 

References

1.  Economic Resources & Data  of the Federal Reserve Bank of St. Louis (Consumer Price Index for All Urban Consumers: All Items in U.S. City Average (CPIAUCSL) | FRED | St. Louis Fed (stlouisfed.org)). Retrieved on September 15, 2024.

2. The National Bureau of Economic Research (NBER) Business Cycle Dating Committee. Business Cycle Dating | NBER. Retrieved on September 15, 2024.

 

The USA and Russia are the leaders in the immigration because the real economic growth is linear. Not exponential!

 The speed of economic growth is often discussed as being exponential. This mean that the growth rate is constant, i.e. the percentage of growth is constant per year. The figure below demonstrates that the growth was linear in the developed countries (two periods are obsereved, however). This is the ecolotion of real GDP per capita. It removes the popualtion growth that was exponential in the US, for example (>1% per year). Personal growth was linear, i.e. a person has constant increment of real GDP (income) per year. This makes the rate of growth to be an inverse fucntion of the attained level of GDP per capita. The rate of real economic growth has been decaying as an inverse fuction of GDP per capita, which is practically the inverse function of time considering the linear GDP pc growth. There is no possibility to retain constant rate of (total) real GDP growth when population does not grow. In the 21st century, the USA suffers very low population growth below 1% and even 0.5% per year. Biden has successfully resolved this problem - immigramtion! Russia also has a very high input from work immigration. Both countries are attaractive for people looking for work and better life.

Kazakhstan is slightly better than Russia in real GDP per capita growth in the 21st century!

Among the independent (Baltic states are not idependent as having large EU subsidies) post-Soviet countries Kazakhstan (according to the Maddison Project Database) outperfroms (by a small margin) Russia in the 21st century (2000 to 2022). Figure 1 compares Russia, Kazakhstan, Azerbaijan, Armenia, and Moldova. The latter 3 countries are poor, even Azerbaijan, which showed excellent results in the 2000s.  Figure 2 illustrates the fact that Azerbaijan is still much better than Moldova and Armenia - bad post-Soviet era perfromers.

Figure 1. The growth of real GDP per capita since 2000. 

Figure 2. Real GDP per capita in 5 countries as listed by the MPD.

Real GDP growth in India 20 years ago

In 2008, I published a paper on real GDP per capita in developed countries and also mentioned some developing ones. The main finding was that (in 2003) China has reached the pace of the most developed countries in the world and India was far-far below its potential growth rate which was >15% per year considering the per capita GDP values.

Citation from this paper:

"Developing counties also can be evaluated according to their compliance to the principal 

characteristic for developed countries. One may often hear about a “fast” growth of some 

developing countries like China and India. There is not criterion, however, to compare their growth 

rate to that expected in the USA, for example, at the same level of economic development. Using 

the mean increment, one can easily estimate a pace for any developing country compared to that 

observed in the developed world. For China, India, and the USSR, the increment evolution 

compared to that for France is represented in Figure 27. One can see that the countries demonstrate 

the per capita GDP increment far below the French mean value (1990 dollars are used as only 

available for all the countries). Having an intention to catch up a developed economy, any 

developing country has to analyze its time history of the GDP per capita increment [Kitov, 2005b]. 

No deficiency has to be allowed on the way to prosperity because any gap is created forever judging 

from the history of such successful developed countries as the USA, France, and others."

Fig. 27. GDP per capita increment for China, India and the USSR for the period between 1950 and 2003 compared to that for France. GDP is expressed in $ 1990, the only available estimates for the non-OECD countries. India is far below the mean increment for France, but China has just reached the pace of leading developed countries. For the period of existence (between 1950 and 1990 in the study), the USSR was only about a quarter as effective as France.

Baltic countries are the major beneficiaries of the EU

The Baltic states are the main gainers in the 21st century. They are by far above top European economies as the figure below shows. Lithuania is even above Russia! How can it be possible?

India is an economic loser, Italy much worse, and Ukraine is catastrophically bad

The next step in the economic comparison after the two previous posts is to find a country even worse than India and Italy. This is Ukraine. As of 2022, its total real GDP per capita  gain in the 21st century was $2998. Italy had  $4884. Interestingly, Ukraine was on a healthy growth path before 2006-2008. Shame on the Ukrainian leadership. 

India is an economic loser of the 21st century but Italy is much worse

 In my previous post, India was mentiones as an economic loser of the 21st century. It's a true statement considering the four largest (real GDP PPP) economies. There are, however, other economies of interest. I published a paper in 2021 "Real GDP per capita: global redistribution of economic power" describing all economies with estimated GDP in terms of real GDP per capita and presented the case of Germany as the vampire of the EU and the other economies as its victims. In 2024, the situation is almost the same with the only change - Germany stalled in eocnomic development. Figure 1 compared the growth in real GDP pc in 8 economies since 2000. The leader is still Russia, but the main loser is Italy with only $4884 added in the 21st century to personal GDP pc. India has $5058 !  

The UK and France are still in the underperformance mode.

Figure 1. GDP per capita since 2000 in 8 countries.

Индия — экономический неудачник 21 века среди четырех ведущих экономик

База данных проекта Мэддисона (MPD) — известный источник данных о реальном ВВП для всего мира. Например, она предоставляет данные за 1 год нашей эры. Всемирный банк дает оценки реального ВВП по ППС на 2023 год с Китаем, США, Индией и Россией в качестве четырех крупнейших экономик. Давайте сравним реальный ВВП на душу населения для этих 4 стран, представленный MPD (версия 2023 года). На рисунке 1 представлена ​​эволюция 4 кривых и определенно показано общее доминирование США с 58 487 долларами в 2022 году. Индия является последней из этих четырех с всего лишь 7 766 долларами. Долгосрочная эволюция включает в себя множество периодов экономического подавления Индии и Китая Великобританией, США, Францией и т. д. 

 Рисунок 1. Эволюция реального ВВП на душу населения (MPD) 

 Самый последний период относительно свободного развития, скажем, 21 век, во всех изученных странах лучше всего может быть представлен совокупным ростом реального ВВП на душу населения. Вместо того, чтобы просто представить разницу в уровнях между 2022 и 2000 годами, мы показываем на рисунке 2 совокупный рост, хорошо иллюстрирующий экономические события в 21 веке. В целом, Россия демонстрирует самый высокий рост ВВП на душу населения, т. е. самый эффективный экономический рост (выглядит как большая проблема для США как «лидера свободного мира»?). Китай и США показывают схожие цифры, вероятно, потому, что они экономически и финансово связаны слишком сильно, чтобы иметь разные темпы роста. Индия намного проигрывает из 4. 

 Рисунок 2. Совокупный рост реального ВВП на душу населения с 2000 года.

 Что-то не так в экономической и финансовой системах Индии. Конечно, у России долгая история свободного развития, чтобы иметь возможность структурировать собственную экономику эффективным образом. Китай был фабрикой США с 1970-х годов и перенял основные системные подходы США с азиатской спецификой. Из рисунка 2 видно, что у Индии большие проблемы, и они, похоже, останутся дольше, поскольку тенденция реального ВВП на душу населения линейна с гораздо меньшим наклоном, чем у других 3 стран. По сути, разрыв увеличивается в 21 веке. Россия лидирует по росту личных карманов в 21 веке — в каждом кармане добавляется 16 000 долларов для покупок и сбережений. Китай развивается с постоянной скоростью, а США подвержены экономическому кризису и пандемии больше, чем другие.

India is an economic loser in 21st century among the top 4 economies

Maddison project database (MPD) is a famous source of real GDP data for the whole world. For example, it provides data for 1 A.C. The World Bank gives real GDP PPP estimates for 2023 with China, USA, India, and Russia as the four largest economies. Let's compare real GDP per capita for these 4 countries as presented by the MPD (2023 version). Figure 1 presents the evolution of 4 curves and definitely shows the overall dominance of the USA with $58,487 in 2022. Inida is the last among these four with just $7,766. The long term evolution includes many periods of economic suppression of India and China by the UK, USA, France and so on. 

Figure 1. Evolution of real GDP per capita (MPD) 

The most recent period of relatively free development, say the 21st century, in all studied countries can be best presented by the cumulative growth of real GDP per capita. Instead of presenting just the difference in the levels between 2022 and 2000, we show in Figure 2 the cumulative growth well illustrating the economic events in the 21st century. Overall, Russia has been showing the highest growth in GDP per capita, i.e. the most efficient economic growth (looks like a big problem for the USA as the "leader of free world"?). China and the USA show similar figures likely becase they are economically and financially connected too strong to have different growth rates. India is by far the loser between the 4. 

Figure 2. Cumulative growth in real GDP pc since 2000. 

Something is wrong in the economic and financial systems in India. Of course, Russia has a long history of free developement to be able to structure own economy in an efficient way. China has been the US factory since the 1970s and has adopted the main systematic approaches of the US with Asain specificity. From Figure2, India has big problems and they seem to stay longer as the trend in the real GDP pc is linear with much lower slope as for the other 3 countries. Essentially, the gap has been growing in the 21st century. 

Russia leads so far in the personal pocket growth in the 21st century - $16,000 is added in each pocket to buy and to save. China evolves at a constant rate and the USA is prone to economic crisus and pandemic more than the others. 

USA vs. Russia. To strike or not to strike?

 One just needs to refresh the US-Soviet case to understand what is preemptive strike and what goes next. The Caribbean crisis is all about such a preemptive strike as the Russian response to the US missiles in Turkey. Both countries removed the rockets. The Russian response to such a strike is as automatic as it will be from the US in the case Russian hypersonic missile flies in the direction of Wash.  From Russia it will be directed to the US motherland not to Europe as the case is strategic.

Соловьев опять о ставке ЦБ

Вот не могу понять кто стоит за Соловьевым с этим процентом ЦБ. Это же первые враги, которые хотят ставку 10 и инфляцию 20, как это обязательно случится. Такая инфляция вызовет много отрицательного и С. будут кричать:″А где был ЦБ!″ Инфляция в 9-10 в России это результат вливания денег правительством, как это происходит и с США. ФРС старается подавить эту внеэкономическую (чисто финансовую с стиле Бернанке с его вертолетными деньгами) инфляцию высокой ставкой. и не очень получается. если хотите низкую инфляцию, то запретите правительству субсидировать то, что оно субсидирует. Тогда и инфляция и рост ВВП  станут малозаметными. В США правительство субсидирует рост рынка ценных бумаг, который за последние 15 лет как раз соответствуют финансовым вливаниям казначейства. Пузырь лопнет и деньги пропадут. К счастью, в России правительство финансирует рост реальной экономики. И получается просто прекрасно - рост в 4-5% в год реального ВВП это один из лучших показателей за все время. Пока в это направлении стимуляции роста есть возможности, так как этот рост во многом восстановительный, а восстанавливать есть много чего. Либералы постарались закрыть индустрию в России. Кажется, они зашли с другой стороны и пытаются тайно влиять на действия ЦБ.

Trump-Harris. Between peace and war

Trump has to ask Harris whether law-enforcement authorities support her election and will fight for her otherwise.

Putin openly "supported" the candidate from D. It is obvious that Putin's support of any candidate will most likely have a negative effect on both, since such support is a double-edged sword. He brought some chaos to the companies of both. This is what Russia should be counting on.

The best outcome of the elections is chaos and clashes, as was assumed and carefully promoted by legal and illegal means by all government and private agents of the USA in relation to the recent presidential elections in Russia and all other countries globally. In this sense, the configuration of forces in the USA looks like this. 1. The top leadership of the US security agencies is completely for D. 2. Most of the rank-and-file employees of these agencies are rather neutral or lean towards R. 3. All agencies are indirectly subordinate to P. As is known from the decision of the US Armed Forces, any order from P. is legitimate.

In this situation, President R. can give an order to restore law and order during peaceful-non-peaceful protests of various D. groups. The leadership of the security agencies will refuse to carry out these orders, but rank-and-file employees will rather carry out P.'s orders. In this case, the arrest of the leaders is inevitable. This will be the beginning of chaos and unrest. If P. becomes D., then the command hierarchy in the security agencies will be respected and P.'s decisions will be carried out unquestioningly. Any attempts by R. to protest will be suppressed almost instantly.

⚡ AFD GEWINNT IN BRANDENBURG!⚡

The Trouble With Heat Pumps

🔴 Truth Exposed: West Wants $26 TRILLION in Ukrainian Rare Minerals in E...

Двое американских астронавтов остались полуживыми-полумертвыми на МКС. Чистейший случай котов Шредингера.

Starliner компании Boeing успешно приземлился. Этот факт скрыл реальность того, что американские астронавты на МКС остались без средств безопасной эвакуации. На МКС было несколько инцидентов, когда весь экипаж был вынужден оставаться в своих посадочных/эвакуационных модулях. МКС 26 лет и не молодеет с каждым днем. Поэтому два члена экипажа МКС сейчас находятся в эксперименте с ящиком Шредингера. Еще один захватывающий эксперимент для Boeing, который убил сотни людей в результате «заговора с целью обмана правительства».

Они полумертвы, поскольку любая экстремальная ситуация в ближайшие несколько месяцев (вспомните выборы в США с черными лебедями) не оставляет шансов на выживание. Мы не знаем и не можем предсказать такие ситуации, но человечество делает все возможное в течение последних нескольких тысяч лет, чтобы снизить риски для спасения жизней. Не США (14 астронавтов погибли в миссиях шаттлов), NASA и Boeing.

Two US astronauts are left half-dead on the ISS. Pure Schrodinger cats case.

Starliner of Boeing successfully landed. This fact masked the reality of the US astronauts on the ISS left without safe evacuation means. There were several incidences on the ISS when all the crew had to stay in their landing/evacuation modules. The ISS is 26 years old and does not get younger every day. Therefore, two crew members of the ISS are now in the Schroedinger box experiment. Another exciting experiment for Boeing killed hundreds as a result of "conspiracy to defraud the government". 

They are half-dead as any extreme situation in the next several months (remeber the US elections with black swans)  leaves no chances to survive. We do not know and cannot predict such situations but the mankind makes everything possible during the last several thousands of years to reduce risks to save lifes. Not the US (14 astronauts died in the space-shuttle missions), NASA, and Boeing.

🔴 TOTAL COLLAPSE: German Economy Is DONE as Its BIGGEST Employer Shuts ...

Трамп-Харрис. На кого ставит Путин и на кого он должен ставить?

 Т.-Х. это в алфавитном порядке на русском. 

Путин открыто "поддержал" кандидата от Д. Очевидно, что поддержка  Путиным любого кандидата  скорее скажется негативно на обоих, так как такая поддержка обоюдоострое оружие. Внес некоторый хаос в компании обоих. На это и надо ставить России. 

Лучший результат выборов это хаос и столкновения, как это предполагалось и тщательно продвигалось легальными и нелегальными способами всеми властными и частными агентами США по отношению к только что прошедшим выборам президента в России. В этом смысле конфигурация сил в США выглядит так. 1. Высшее руководство силовых органов США полностью за Д. 2. Большинство рядовых сотрудников этих органов скорее нейтральны или склоняются к Р. 3. Все ведомства опосредовано подчиняются П. Как известно из решения ВС США, легитимен любой приказ П. 

В этой ситуации президент Р. может отдать приказ о наведении законного порядка при мирных-немирных выступлениях различных групп Д. Руководство силовых структур откажется выполнять эти приказы, но рядовые сотрудники скорее будут выполнять приказы П. В этом случае арест руководителей неизбежен. Это будет началом хаоса и беспорядков. Если П. станет Д., то командная иерархия в силовых структурах будет соблюдена и решения П. будут выполняться беспрекословно. Любые попытки Р. протестовать будут подавлены почти мгновенно. 

Мы за Д. или за Р.?