Friday, February 27, 2015

Federal Funds Rate vs Median Household Income

Sustained drops in median income seem to be the rule rather than the exception. Once median income starts to fall, the drop seems to gather momentum and be hard to arrest, at least with monetary policy. What starts the drops? Is it policy or a natural cycle?

Here we have a graph of the federal funds rate against median income. While the graphs are not completely synchronized, their shapes are largely similar. While median income rises, the Federal Funds Rate increases. When median income falls, the Federal Funds rate also falls. The exception to this pattern is 1995-1998, when the Fed allowed median income to rise without responded with interest rate increases. Perhaps not coincidentally, that was the longest period of sustained income growth covered by this data series.

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