“Positive real rates” means the interest rate for a given maturity is higher than the inflation rate. He wants to see this “across the entire yield curve” before the Fed stops tightening.
So, Powell wants to see every interest rate from overnight out to 30 years higher than the inflation rate. Which inflation? For Powell, that means the Core PCE index, which is part of the GDP dataset. The last report put year-over-year core PCE at 5.1%.
The “core” part means it excludes food and energy. Falling food and energy prices have no immediate effect on core PCE. Its main drivers are housing prices and rent, which are weakening in real time but not in the way it is calculated using the absurd Owner’s Equivalent Rent and lagged rent as input sources.
If we take Powell at his word (and I do), he’s told us quite plainly the federal funds rate is headed for 5%, unless inflation should mysteriously and unexpectedly go way down.
It could need to go even higher if the rest of the yield curve doesn’t respond as desired.
If Powell stays the course, he will get us to the point where inflation is not the main driver and employment once again is.
For the record, I think the employment mandate is misplaced. That should be a fiscal policy role, not monetary policy. But for now the Fed has to consider it.
John Mauldin 11 November 2022