Why 0% Rates Make 0 Sense

By Charlie Bilello

12 Oct 2021

Pretend for a moment that you’ve been stranded on a desert island and have no idea where Fed policy stands. After being recued, you’re given the following the information…

  • US Real GDP is at its highest level ever, up 12% over the last year and on pace for its highest annual growth rate since the early 1980s.
  • The Unemployment Rate is 4.8%, a full percentage point below the historical average (5.8%).
  • There are 10.9 million Job Openings in the US, the highest level in history.
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  • Average Hourly Earnings are at a record high, up 4.6% over the last year, well above the average growth rate over the last 10 years (2.8%/year).
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  • The stock market is up 17% on the year, hitting 54 all-time highs thus far in 2021.
  • Corporate earnings are record highs.
  • Corporate sales are at record highs, up 21.8% in the last year, their highest growth rate ever.
  • Profit margins have never been higher than they are today.

  • Housing Prices are at all-time highs, up a record 19.7% over the last year.
  • The median price of a new home is now more than 5.8x higher than the median income. That’s a record high.
  • Rents are rising at their fastest pace ever, up 16.7% year-to-date with 3 months to go.
  • Crude Oil is above $80 a barrel for the first time since October 2014, more than doubling in the past year.
  • Gasoline prices are at a 7-year high.
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  • The Consumer Price Index increased 5.4% over the last year with Core prices (excluding food/energy) up 4%.
  • The PCE price index is up 4.3% over the last year, its highest rate of increase since 1990.
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  • Producer prices are surging, up 8.3% over the last year.
  • Consumers are expecting inflation of 5.2% over the next year and 4.0% per year over the next 3 years.
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Given all of this information, where would you guess short-term interest rates would be?

2%? 3%? 4%? Higher?

All of those would have been reasonable estimates in the past, when the Fed actually set monetary policy based on its dual mandate of price stability and maximizing employment.

But today interest rates are being held at 0% and are expected to remain there for at least another year.

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No one knows where interest rates would be if they were dictated by the free market and not by the Fed, but it’s safe to assume they would be higher.

0% rates make 0 sense.

And with each passing day the repercussions from keeping them there grow.

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