Rallying markets suffer from a doveish illusion

ranks among the more lyrical-sounding concepts in economics. It refers to the mistake that people make when they focus on nominal rather than real values. Anyone chuffed to get a hefty pay rise over the past year without considering whether, after inflation, they can actually buy more has fallen prey to the illusion. Financial investors ought to be savvier, but they too can be seduced by a lovely nominal story. The Federal Reserve’s downshift to smaller interest-rate rises is a case in point.

Yet what ultimately matters for the companies and households that need to borrow money is the real, not the nominal, rate of interest. Here, the outlook is a little more complicated—and almost certainly less rosy. Conventionally, many observers simply subtract inflation from interest to obtain the real rate. For example, with annual consumer-price inflation of 6.5% in December and the federal funds rate that month at a ceiling of 4.

The party has just begun.

Interest rates can be tricky to understand, but the outlook for real rates probably isn't as bright as many people think. economics finance

Money MUST cost something to borrow over time. Extended low interest rates produced damage throughout the system, but put off paying the cost.

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