Real Interest Rates Are Moving Up, but Don’t Celebrate Yet

Money Illusion

Then there is a basic issue. Are interest rates really higher than inflation, which is what “positive real rates” would seem to mean in ordinary English?

The answer isn’t straightforward.

Since the Fed started raising rates in March, an array of market interest rates — including rates on money market accounts, savings accounts and a broad range of Treasury securities — have certainly levitated from near zero.

Yields for fixed-income investors improved greatly by the middle of last year. In June, I pointed out that, for the first time in years, money market funds and high-yield savings accounts were beginning to offer appealing rates. But I also warned that investors shouldn’t fall prey to what the American economist Irving Fisher called “the money illusion”: In real, inflation-adjusted terms, investors in money market accounts, bank savings accounts and Treasuries weren’t keeping up with inflation. Those rates may have looked good, but in reality your money was still losing value.

Now, the picture is definitely a bit brighter. When Mr. Powell and others say “real rates” or “real yields” are positive, they are saying the return you receive on safe investments is higher than the expected rate of inflation. This wasn’t the case at the beginning of last year, when Treasury rates were all negative in these inflation-adjusted terms.

Real, or inflation-adjusted, rates began turning positive last year, and now they all are, according to the U.S. Treasury’s data. That’s a big advance, and I wouldn’t minimize it.

Positive? Not Entirely.

There is a catch, however, and it’s so big that despite the absolutely correct statements pointing out that positive real rates have arrived — claims made by authorities like Mr. Powell and former Treasury Secretary Lawrence Summers — it’s not yet time for most risk-averse investors to rejoice.

The problem is that interest rates are not unequivocally positive, at least not in the way most of us think about inflation. As a consumer, what matters to me is what I have to pay for goods and services. When I go shopping, my intuitive sense is that the cost of living is still rising too quickly for comfort. You can make your own judgment.