I don’t believe your reasoning about the real rate being strongly negative is correct (the real rate could be negative, but not based on the above), because of the following.
You are saying that the real interest rate is (Fed funds rate) - (inflation rate)
but this is not the real interest rate experienced by the broad economy.
First, the Fed funds rate is a short-term rate and many participants in the economy borrow over some period of years.
Second, participants in the economy experience something like
(interest rate for lending/borrowing over Y years) - (inflation rate over Y years)
What are some current interest rates for participants in the economy?
| Loan Type | Rate |
|---|---|
| high yield bonds | 9.42% |
| inv grade corporate bonds 7-10 yr | 6.02% |
| residential mortgages 30-yr fixed | 6.66% |
| consumer auto 6-yr | 5.50% (as of August) |
Third, aside from the calculation of real rates, what do informed participants say about current real rates?
Fed Chair Powell said: “…we’ve just moved [the Fed funds rate] I think probably into the very lowest level of what might be restrictive…”
This means Powell/Fed thinks that current real rates are most likely at least somewhat above 0%.
TIPS 5-yr Yield = 1.69%
The Treasury market is accepting real yields of 1.69% when purchasing TIPS for a 5 year maturity.
So, both the Fed and the Treasury market believe that real rates are > 0 and certainly not “strongly negative.” (Powell and the Treasury market could be wrong)
(ICE BofA US High Yield Index Effective Yield (BAMLH0A0HYM2EY) | FRED | St. Louis Fed)
(ICE BofA 7-10 Year US Corporate Index Effective Yield (BAMLC4A0C710YEY) | FRED | St. Louis Fed)
(Mortgage Rates)
(Finance Rate on Consumer Installment Loans at Commercial Banks, New Autos 60 Month Loan (RIFLPBCIANM60NM) | FRED | St. Louis Fed)
Powell transcript (https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220921.pdf)
Treasury Market 5-yr Yields (Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Quoted on an Investment Basis, Inflation-Indexed (WFII5) | FRED | St. Louis Fed)