Real Interest Rates "Historically" High Or Low? Bond Market Legs?

Jim Rickards says real interest rates are high on a historic basis. That statement caught my attention.

In a Daily Reckoning article, Jim Rickards states This Bond Bull Market Still Has Legs.

Rickards’ article contains some interesting anecdotes regarding bond trading and his relationship with the Fed. It’s well worth a read.

Here is the set of paragraphs that caught my attention.

Rates of 13% when inflation is 15% are actually stimulative. Rates of 3% when inflation is 1% are actually contractionary. In these examples, 2% is a “high” rate and 13% is a “low” rate once inflation is factored in. [No problem with this paragraph.]

The situation today is much closer to the latter example. [Really?]

The yield to maturity on 10-year Treasury notes is currently around 2.7%, the highest since the yield briefly touched 3% at the end of 2013. Inflation as measured by the PCE core deflator (the Fed’s preferred measure) is currently about 1.5% year over year. Using those metrics, real interest rates are about 1.2%, relatively high by historic standards. [Whoa!]

Let’s put that thesis to a chart test.

10-Year Treasury Yield Minus PCE (Excluding Food and Energy)

10-Year Treasury Yield Minus PCE

I have two problems with Rickards’ statements.

Whether one uses core PCE (excluding food and energy) or full PCE the spread is not historically low.

Neither chart represents “real” rates. The following charts do.

Fed Funds Rate Minus PCE (Excluding food and Energy)

Fed Funds Rate Minus PCE

The above two charts represent “real” interest rates as commonly understood. And both are negative.

Look at the unprecedented length of time the Fed held rates negative. When Fed Chair Janet Yellen repeatedly stated “real interest rates are accommodative” she wasn’t fooling.