Every major developed country central bank in the world is maintaining negative real interest rates in what is now the 9th year of a global economic expansion.

 

Source Data: Investing.com and Pension Partners, as of February 1, 2018. Real interest rates = nominal interest rates minus the inflation rate (CPI = consumer price index).

Why are central banks continuing to behave as though we are in the midst of an economic crisis?

If you believe their rhetoric, it is mainly due to fears of “deflation.” But rhetoric does not equal reality in this case. As one can readily see in the above table, CPI increases are positive, not negative, in all countries maintaining easy money policies.

Which brings us to the title of this post.

Under the guise of deflation, central banks were aggressively easy when Crude Oil declined over 70% from mid-2014 through early 2016.

 

Source: Stockcharts.com and Pension Partners. Date Range: June 13, 2014 – February 11, 2016.

Over that time, inflation expectations (as measured by the 10-year breakeven inflation rate), plummeted. The European Central Bank (ECB) and Bank of Japan (BOJ) pushed rates into negative territory, and have maintained those policies ever since.

 

Source: FRED and Pension Partners. Date Range: June 13, 2014 – February 11, 2016.

This is interesting because Crude Oil has since rallied over 140%.

 

Source: Stockcharts.com and Pension Partners. Date Range: February 11, 2016 – January 26, 2018.

And inflation expectations are quietly moving back up.

 

Source: FRED and Pension Partners. Date Range: February 11, 2016 – February 1, 2018.

Will this evidence of reflation bring an end to the longest period of easy money in history?

We’ll only know in hindsight, but it’s a disconnect becoming more glaring by the day. How much longer will global central banks maintain crisis-era policies when there is no such crisis?

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