Positive Real Yields

Positive Real Yields

One element to consider when contemplating the forward yield curve and equity premiums is that the yield curve may settle at a level that is higher than what investors anticipate in the out years – say 2025 forward. P/E Multiples are behaving as if a zero percent Fed Funds Rate is the long-term norm, which may not be the case.

Fed Chair Powell mentioned his desire to achieve positive real yields across the yield curve during his September 21st FOMC remarks. If Powell holds true to his word, and if the CPI were to settle at 3-4% in the out years rather than 2%, the Fed Funds Rate and the Risk Free Rate could in fact settle at a level above current expectations (The Fed’s median Fed Funds Rate projection over the long-term is 2.5%).

Here is the link to Powell’s 9/21 FOMC remarks: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20220921.pdf

Here is an excerpt of Powell’s comments: “… you want to be at a place where real rates are positive across the entire yield curve. And I think that would be the case if you look at the numbers that we’re writing down and think about, you measure those against some sort of forward-looking assessment of inflation, inflation expectations, I think you would see at that time, you’d see positive real rates across the, across the yield curve and that is also an important consideration”.

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