Real Short-Term Rates Above 1%, By At Least One Metric

The most revealing parts of Chair Powell's post-meeting press conference Q&A surrounded restrictive policy. For one thing, his comments on getting to a restrictive level of policy underlined that they had further to go to the upside (“we've just moved into the very lowest level of what might be restrictive. In my view and the view of the Committee, there's a ways to go.”).

• On what restrictive means, he defined it by way of factors that would put “downward pressure on inflation”, “at a place where real rates are positive… you would see positive real rates across the yield curve and that is an important consideration”.
• More specifically, he said in response to a question from MNI that when getting to a 4.6% terminal rate next year, “you'll have a positive federal funds rate at that point, which could be 1% or so. But I don't know exactly when it would be, but it would be significantly positive when we get to that level”.
• By at least one metric, we are already there: 1 year, 1 year-forward OIS rates over CPI forwards have breached 1% for the first time since 2009 - prior to yesterday's FOMC it was just below 1%. That compares to -2.6% at the mid-2021 low. See chart.
• As we discussed in our FOMC meeting review, expect further speculation about the real rates outlook as opposed to merely the nominal funds rate path going forward in assessing how “restrictive” the Fed sees policy.

Source: MNI, BBG