{"id":1155939,"date":"2019-12-16T16:30:47","date_gmt":"2019-12-16T22:30:47","guid":{"rendered":"https:\/\/dailyreckoning.com\/?p=108739"},"modified":"2019-12-16T16:30:47","modified_gmt":"2019-12-16T22:30:47","slug":"central-banks-pushing-for-negative-real-interest-rates","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1155939","title":{"rendered":"Central Banks Pushing for Negative (Real) Interest Rates"},"content":{"rendered":"

This post Central Banks Pushing for Negative (Real) Interest Rates<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

This summer I was in Bretton Woods, New Hampshire, along with a host of monetary elites, to commemorate the 75th anniversary of the Bretton Woods conference that established the post-WWII international monetary system. But I wasn\u2019t just there to commemorate\u00a0 the past \u2014I was there to seek insight into the future of the monetary system.<\/p>\n

One day I was part of a select group in a closed-door \u201coff the record\u201d meeting with top Federal Reserve and European Central Bank (ECB) officials who announced exactly what you can expect with interest rates going forward \u2014 and why.<\/p>\n

They included a senior official from a regional Federal Reserve bank, a senior official from the Fed\u2019s Board of Governors and a member of the ECB\u2019s Board of Governors.<\/p>\n

Chatham House rules apply, so I can\u2019t reveal the names of anyone present at this particular meeting or quote them directly.<\/p>\n

But I can discuss the main points. They essentially came out and announced that rates are heading lower, and not by just 25 or 50 basis points. They said they have to cut interest rates by a lot going forward.<\/p>\n

They didn\u2019t officially announce that interest rates will go negative. But they said that when rates are back to zero, they\u2019ll have to take a hard look at negative rates.<\/p>\n

Reading between the lines, they will likely resort to negative rates when the time comes.<\/p>\n

Normally forecasting interest rate policy can be tricky, and I use a number of sophisticated models to try to determine where it\u2019s heading. But these guys made my job incredibly easy. It\u2019s almost like cheating!<\/p>\n

The most interesting part of the meeting was the reason they gave for the coming rate cuts. They were very relaxed about it, almost as if it was too obvious to even point out.<\/p>\n

The reason has to do with real<\/i> interest rates.<\/p>\n

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today\u2019s interest rates and think they\u2019re already extremely low. But when you consider real interest rates, you\u2019ll see that they\u2019re substantially higher than the nominal rate.<\/p>\n

That\u2019s why the real rate is so important. If you\u2019re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.<\/p>\n

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 \u2013 2 = 2).<\/p>\n

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher<\/i> than the nominal rate. Then the real rate is negative<\/i>.<\/p>\n

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 \u2013 5 = -1).<\/p>\n

The U.S. has never had negative nominal rates (Japan, the eurozone and Switzerland have), but it has had negative real rates.<\/p>\n

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.<\/p>\n

Nominal rates of 13% when inflation is 15% are actually stimulative. Rates of 3% when inflation is 1% aren\u2019t. In these examples, nominal 2% is a \u201chigh\u201d rate and 13% is a \u201clow\u201d rate once inflation is factored in.<\/p>\n

The situation today is much closer to the latter example.<\/p>\n

The yield to maturity on 10-year Treasury notes is currently around 1.8%, which is extremely low by traditional standards. Meanwhile, inflation as measured by the PCE core deflator (the Fed\u2019s preferred measure) is currently about 1.6% year over year, below the Fed\u2019s 2% target.<\/p>\n

Using those metrics, real interest rates are above zero. But more interestingly, they\u2019re higher than the early \u201980s when real rates were -2%.<\/p>\n

That\u2019s why it\u2019s critical to understand the significance of real interest rates.<\/p>\n

And real rates are important because the central banks want to drive real rates meaningfully negative. That\u2019s why they have to lower the nominal rate substantially, which is what these central bank officials said at Bretton Woods.<\/p>\n

So you can expect rates to go to zero, probably sooner or later. Then, nominal negative rates are probably close behind.<\/p>\n

The Fed is very concerned about recession, for which it\u2019s presently unprepared. It usually takes five percentage points of rate cuts to pull the U.S. out of a recession. During its hiking cycle that ended last December, the Fed was trying to get rates closer to 5% so they could cut them as much as needed in a new recession. But, they failed.<\/p>\n

Interest rates only topped out at 2.5%. The market reaction and a slowing economy caused the Fed to reverse course and engage in easing. That was good for markets, but terrible in terms of getting ready for the next recession.<\/p>\n

The Fed also reduced its balance sheet from $4.5 trillion to $3.8 trillion, but that\u2019s still well above the $800 billion level that existed before QE1 (\u201cQE-lite\u201d has since taken the balance sheet up above $4 trillion, but the Fed has done its best to downplay it).<\/p>\n

In short, the Fed (and other central banks) only partly normalized and are far from being able to cure a new recession or panic if one were to arise tomorrow.<\/p>\n

The Fed is therefore trapped in a conundrum that it can\u2019t escape. It needs to rate hikes to prepare for recession, but lower rates to avoid recession. It\u2019s obviously chosen the latter option.<\/p>\n

If a recession hit now, the Fed would cut rates by another 1.50% to 1.75% in stages, but then they would be at the zero bound and out of bullets.<\/p>\n

Beyond that, the Fed\u2019s only tools are negative rates, more QE, a higher inflation target, or forward guidance guaranteeing no rate hikes without further notice.<\/p>\n

Of course, negative nominal interest rates have never worked where they\u2019ve been tried. They only fuel asset bubbles, not economic growth. There\u2019s no reason to believe they\u2019ll work next time.<\/p>\n

But the central banks really have no other tools to choose from. When your only tool is a hammer, every problem looks like a nail.<\/p>\n

Now\u2019s the time to stock up on gold and other hard assets to protect your wealth.<\/p>\n

Regards,<\/p>\n

Jim Rickards
\nfor The Daily Reckoning<\/i><\/p>\n

The post Central Banks Pushing for Negative (Real) Interest Rates<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

This post Central Banks Pushing for Negative (Real) Interest Rates<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

To understand the Fed, don’t just look at the nominal interest rate. It’s the “real” interest rate that counts…<\/p>\n

The post Central Banks Pushing for Negative (Real) Interest Rates<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"author":14,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[1417,3724,366,818,715,465,463],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1155939"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/14"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1155939"}],"version-history":[{"count":1,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1155939\/revisions"}],"predecessor-version":[{"id":1155940,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1155939\/revisions\/1155940"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1155939"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1155939"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1155939"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}