from Money News:
While we are busy arguing whether the Fed’s exit will consist of rising rates, reverse repos or the trimming of its massive portfolio, the Fed may well be fooling all of us. Investors must have been swallowing lots of blue pills not to see the illusion hiding in plain sight.
Let’s assume that we will indeed get a rate hike next year, and that the Fed will have figured out how to implement it. We may get our exit all right, but it’s not the sort of exit most appear to be expecting. That’s because in our humble view, an “exit” ought to reflect a path towards normalization, away from financial repression, back to an environment where pensioners might once again be able to live off income generated from their savings.
If anyone dares to take a red pill, you will learn that interest rates net of inflation, i.e. real interest rates, have not only continued to be negative, but become more negative of late, meaning inflation has started to inch upward. For normalization to occur, interest rates must move higher faster than the pace of inflation; and not only do real interest rates need to move higher, they ought to move into positive territory to suggest we might be exiting financial repression.
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