Comparing Presidents, Inflation and Real Interest Rates

The post had to be heavily modified. Every so often I make a mistake. Its both a pro and con of trying to be open and transparent… sometimes you get egg on your face, but at least you learn something. Reader Spencer indicated there was a problem with Table 1. So I redid it. And there was an error. Which caused me to change the rest of the post… apologies

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This post is on inflation and the real fed funds rate and how both moved over time, focusing in particular on the various Presidential administrations since Ike. The inflation is just the percentage change in the CPI – since the data is provided monthly, I elected to go from January to January, as that is the month in which new Presidents are inaugurated. The real fed funds rate is just the Fed Funds Rate (again, for January) less the rate of inflation for the year.

Now, it should be noted that the President does not control inflation or the Fed Funds rate – both are controlled by the Federal Reserve. That is not to say the Fed doesn’t react to what the President is doing… a President might in effect provoke the Fed into inflicting inflation on the economy by engaging in particularly silly fiscal policy. For example, if the President institutes a particularly inane set of tax cuts plus finds a way to drive up the deficit in a way virtually designed not to provide much fiscal stimulus, the Fed might be forced to react by making money very, very cheap for a long time. But enough about the GW administration… let’s look at the graphs.

Here’s a graph of the inflation..

Here’s a summary.

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updated comment

I’ve had several people comment on this with questions. Clearly I have done a poor job of explaining the series…. and apparently I truncated the table (relative to how I normally present it… I’ve expanded the table). Apologies.

Here’s the deal… January to January when Ike took office was 0.38%. When he left office it was 1.71%. Thus, the Fed allowed inflation to increase by a relatively large amount from the time he started in his job to when he left. This is not to say inflation was high… merely that it grew by quite a bit.

Sorry if this hasn’t been clear.

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Here’s a graph of the real fed funds rate.

There’s no summary of the real fed funds rate… since it goes from positive to negative and vice versa in some terms, the percentage change is not a meaningful term. Sorry.

Anyway, what do we get from this?

So what happened under Nixon/Ford and GW? Well, in the former instance, the economy was in trouble with the oil embargo, and with the breakdown of the Bretton Woods system, the Fed found itself in waters that had been uncharted for a long time. Mistakes happen. With GW… the tax cuts in 2001 and 2002 and 2003 were not of the sort designed to provide any real fiscal stimulus after the slight downturn in March 2001, and as the downturn seemed to extend and extend (recall – GW likes to count changes from August of 2003), the Fed stepped in with a series of rate cuts.

Does any of this matter? Who knows? But a quick look at the correlation between inflation and real median income…

As always, correlations are simplistic… ignoring the cross-effects of multiple factors but…. Inflation and percentage change in real median income are negatively correlated (-0.6). Inflation in any given year doesn’t seem to have a big effect on income the next year… but its possible with more granular data we can show that higher real median income actually affects the inflation rate. Now… recall from a post a while back that JFK/LBJ and Clinton were the two administrations during which real median grew the fastest. The JFK/LBJ median income growth is certainly surprising in this context.

I’ll try to do see how all this ties in with home ownership at some later point.

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Another update… this seems to be the most “everything that can go wrong will go wrong” post I’ve ever written. Courtesy of reader dxc… the original graphs had no labels except 0s on the Y axis. Its been corrected (I hope!).

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