I’ve been looking at real long term interest rates as proxied by nominal rates minus expected inflation. The problem of course is finding measures of expected inflation. Subtracting off the ex post rate (appropriate under the rational expectations hypothesis) can lead to misleading inferences — and is not practicable for current measures of long term rates. Using ten year constant maturity rates and the Society of Professional Forecasters 10 year horizon CPI inflation rates yields the following picture.
Figure 1: The Net Export to GDP ratio and the ten year constant maturity yield (end of quarter) yield minus the ten year ahead (median) expected CPI inflation rate. Source: FRED II and Philadelphia Fed.
The interesting thing is that recent periods indicate an increase in the real rate, with no apparent diminishment in the US trade deficit (as measured by the NIPA). So much for the saving glut hypothesis.
Is this finding an artifact of the measure of real interest rates used? I don’t think so. In Figure 2 I plot the above measure (green), and compare it agains the inflation indexed measures for the 10 year TIPS yield (red) and 30 year TIPS yield (blue).
Figure 2: Ten year constant maturity yield (end of quarter) yield minus the ten year ahead (median) expected CPI inflation rate (green), 10 year TIPS yield (red) and 30 year TIPS yield (blue), in percentage points, daily averaged data. Source: FRED II and Philadelphia Fed. (revised 1/3/07)
In fact, using the 10 year TIPS yield indicates that the real yield is back to
2001 early 2002 levels (rev’d 1/3/07), building an even stronger case for a diminution of the “saving glut”.