What is the real interest rate? Basically it is the federal funds rate controlled by the Fed minus the median Consumer Price Index ("CPI"), a widely used measure of inflation...If the real rate stay in the positive territory, your money has a good buying power. When it turns to negative, then you quickly lose your purchasing power. Or in a lawman's language, your money is losing its value.
Right now as shown above, we are seeing something truly historical and "unprecedented"... At least since the mid-1980s, when this data began, we've never seen a period of higher inflation and lower interest rates...Lower rates mean the central bank is keeping things "easy" for the economy to grow, which sounds good... unless inflation gets out of hand. That's what we see today...
If you look closely at the chart, you may also notice that when the difference between interest rates and inflation has been increasing (or falling on the chart) at the rate it has been recently, a recession (the grey bar) has often followed...
This is another warning sign. As I said, we are seeing more and more warning signs these days, all pointing towards one direction......recession!
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