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Fed Sponsored Speculation: Real Interest Rates Are -4.1 Percent, Lowest Since 1980

The real interest rate is -4.09%. Adjusted for housing prices, the real interest rate is even more negative.
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Real Interest Rates 2021-04

Real Interest Rates

Real means inflation adjusted. We can calculate real interest rates by subtracting the Fed Funds Rate from the CPI. 

Adjusted for the Case-Shiller housing indexes, rates are even deeper into negative territory.

Case Shiller Home Price Index 

Case Shiller Home Price Index as of  2021-02

CS National, Top 10 Metro, CPI, OER 

CS National Top 10 Metro CPI OER 2021-02

Owners' Equivalent Rent (OER) Discussion

The latest housing data is from February. CPI and Owners Equivalent Rent (OER) are from April.

OER is the single largest component of the CPI with a weight of 24.071%. 

Year-over-year the CPI is up 4.16%. OER is only up 2.04% from a year ago.

CS National, Top 10 Metro, CPI, OER 

CS National Top 10 Metro CPI OER 2021-02 Index Levels

The CPI is artificially low because it does not include housing prices. It used to, now it doesn't.

Until 1999 OER and home prices were in sync and the substitution did not matter. 

It matters now.

CPI Reweighted by Actual Home Prices

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CPI, CS-CPI Percent Change 2021-02

Case-Shiller CPI

The above chart shows the result of reweighting the CPI using actual home prices instead of OER. 

I call the result Case-Shiller CPI.  

The housing numbers are from February. I held the housing numbers constant for two more months so all calculations would be as of April.

Given that home prices are still rising, the Case-Shiller CPI numbers are therefore understated. 

The lead chart shows the numbers.

Real Interest Rates

  • CPI: -4.09%
  • CS-CPI National: -5.47%
  • CS-CPI Top 10: -5.68

The real interest rate as measured by the CPI is -4.09%.

The real interest rate as measured by the national home price index is -5.47%.

The real interest rates as measured by the top 10 cities is -5.68%.

Fed Sponsored Speculation

With the Fed pegging short term interest rates near zero although inflation is between 4.16% and 5.75% it's no wonder stock prices and asset speculation is running rampant.

Free Money 

Thanks to three rounds of free money by Congress, once under Trump and twice under Biden, Spending Has Fully Recovered Nearly Everywhere.

Free money from Congress coupled with record low real interest rates creates a fertile ground for speculation in anything and everything.

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