Consumer price inflation, represented here by year-over-year increases in the personal consumption expenditures deflator (black line), is closely watched by the Federal Reserve Board. It is clear from this chart that the Fed’s setting of the discount or fed funds rate is responsive to changes in the rate of inflation.
Current Comment: Increases in the Fed Funds Rate enabled it to catch up with the inflation rate by late 2006. With the recent slowdown in consumer price inflation, however, the Fed Funds Rate is now actually running 2 percentage-points less than the rate of inflation.
