Blog: Are "Real" Rates High?
The moderate inflation regime justifies a higher real rate.
In economics and market analysis we like to put things in real terms. Here, "real" means in excess of inflation. But like a lot of economic terms, there is no way to know what real rates are, because we don't really know what inflation is, as I've discussed before. We have plenty of numbers that are supposed to measure aspects of inflation (which is why they all have different names), but inflation is one of those things we know when we see it, but can't really describe accurately.
So now that the Fed and other central banks have signaled that rate hikes have ended, the focus has been on when they should cut them. A recent article in the Wall Street Journal by Nick Timiraos points out that the neutral rate (where growth and inflation are balanced) was always thought to be 2.5%. Despite that, the market is calling for further rate cuts even as the economy seems to be booming and intimate that real rates are too restrictive. But is this true?