Barron’s LTE (Copy)

Published in Barron’s.

In asking “Is the Federal Reserve Using Overheated Data?” (Up & Down Wall Street, March 11), Randall W. Forsyth did the math: “If the Fed fulfills its own expectations of three [interest rate] hikes this year, it would put its target at 1.25 percent to 1.5 percent.” Let’s call it 1.5 percent at the end of this year. That is still a very low and substantially negative real interest rate. Against the Fed’s own goal of perpetual inflation at 2 percent a year, it is a real rate of negative 0.5 percent. Against the 2.5 percent increase in the consumer price index year over year through January 2017, it is a negative 1 percent real rate.

Although negative real interest rates during a crisis are usual, continuing them for nine years after the crisis ended, as it will be a year from now, serves powerfully to distort asset prices and rob savers.