It’s about to get Real (real fast)… The chart below shows the 10-year real rate and real effective Fed Funds Rate versus the 10-year average of annual U.S. labor force growth. Historically, the Great Moderation (1985-2020) came with declining inflation and 10Y real rates continuing to slide lower alongside a slowdown in labor force growth. Then, with the Fed’s QE pushing real rates down, market-based real rates actually went negative (very unnatural). US real rates have not been this high since the Global Financial Crisis, and the last time they were positive (very briefly and at much lower levels) was pre-pandemic. All in all, we believe current real rates are restrictive in the US, slowing economic activity by raising the real cost of capital. By extension, given the US high debt loads, hard to keep real rates high! At the same time, we do not believe real rates will go back to pre-pandemic levels (nor go negative again) instead they’ll trade in a higher range, mirroring the recalibration of labor force (all the while we search for the actual neutral rate). tinyurl.com/3z3u6j5p