R Street Institute

Analysis

Fed continues negative real interest rates

by Alex J. Pollock
June 14, 2018
Print
issues: Central Banking/Federal Reserve, Federal Government Affairs, Finance and Trade
The Federal Reserve yesterday raised its target fed funds rate to a range of between 1.75 percent and 2 percent; let’s just call it 2 percent. That feels a lot higher than the nearly 0 percent it was from the end of 2008 to 2015, but it is still very low and still less than the current rate of inflation. The Consumer Price Index rose over the last 12 months by 2.8 percent, so to do the simple arithmetic:

New Federal Reserve target interest rate 2%
Less: Inflation rate 2.8%
Equals: Real short-term interest rate (0.8%)

 

In short, nine years after the end of the last recession, nine years into the bull stock market and six years after house prices bottomed and began a new ascent, the Fed is still forcing negative real short-term interest rates on the economy, the financial system and savers.

No wonder that it continues to preside over a massive asset price inflation.

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