Financial repression has been a characteristic of financial markets at the short-end of the yield curve. With headline CPI inflation running at 1.7 percent as of September, the real return for savers/investors at the short-end of the yield curve has been negative for the past 6 years (see top graph). This result has reduced the incentive to save, while increasing the incentive to borrow at the short-end of the curve.
However, going forward, as interest rates escape the bounds of administered rates, interest rates are likely to drift upwards. This creates risk to the housing and auto recovery as modest increases in financing may provide a haircut on sales—particularly as credit standards on both have eased recently and higher rates will sink some of these potential borrowers.
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