Bob Cunneen, Senior Economist and Portfolio Specialist

Sources: CNBC interview on 10 June 2019 Datastream.

* The US real interest rate is calculated by taking the Federal Funds mid-rate, then subtracting an average of core CPI annual inflation and the 10 year break even inflation measure from the bond market.

President Donald Trump is annoyed with the US central bank. In a recent interview, President Trump criticised the Federal Reserve’s (Fed’s) decision to raise US interest rates in December 2018 as “a big mistake” as “they raised interest rates far too fast.”

Certainly the Fed has raised US interest rates significantly. The Federal Funds nominal interest rate (blue line) has risen from near 0% in 2015 to now stand between 2.25% and 2.5%. However this net 2% increase in US interest rates is hardly “fast” considering that this has occurred over an extended period of three years between 2015 and 2018. The Fed has actually been gradual rather than impulsive in raising US interest rates.

Where President Trump may have cause for being ‘fed up’ is whether US interest rates are too high now. Current US inflation pressures are modest with the annual core CPI inflation rate running at only 2% and inflation expectations around 1.7%. Taking the nominal US interest rate and then subtracting these inflation measures shows that the real US interest rate averages only 0.5% (red line*). Essentially current US nominal interest rates barely compensate for inflation. By historic standards the US real interest rate, now at 0.5%, is still low compared to the 3% level reached in 2007.

So President Trump’s view that the Fed is “far too fast” on US interest rates is more ‘fake news’ than factual.

Source : Nab assetmanagement June 2019 

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