One Way We Could Explain the Latest FOMC Decision: Rise Over Run

Chief Economist Eugenio J. Alemán discusses current economic conditions.

What do we mean by ‘rise over run?’ For those of you that are math geeks, you will get it fast enough. However, for those of you who are not math geeks, ‘rise over run’ is the formula for the slope of a line. What does this have to do with the latest Federal Reserve (Fed) decision, you may ask? Please be patient as we try to explain what we mean.

Here goes. By mid-year last year, Fed officials were calling for a terminal federal funds rate for this tightening cycle of about 5.75% for the upper band of the federal funds rate, with a median of 5.6%. However, over the course of the second half of 2023, and as inflation was slowing down further, the Fed started to lower its view on the terminal rate and settled on a terminal rate of 5.25% to 5.50%, which is the rate we have today.

This federal funds rate is the ‘rise’, that is, the height that determines one of the components of the slope of a line. On the other hand, the ‘run’ is, in this case, the duration or for how long the rate is going to remain at this level in order to achieve the Fed’s target of 2% for the PCE price index.

Federal Funds Target Rate