While the question of whether the Fed will lower interest rates again after its emergency cut last week is still up in the air, it is pretty clear that further cuts in the Fed’s target rates are in the offing. And the markets believe the Fed will continue to cut quickly, putting the odds of a 50 basis point cut tomorrow at 88%

At a Fed funds rate of 3.5%, some would say the Fed has already created negative interest rates:

This view, that published real inflation rates understate the real level of price increases, is due at least in part to the work of the Boskin Commission, whose work led to changes in the computation of the consumer price index in the mid 1990s. Some believe that these moves lowered reported CPI by 0.5%, others argue for 1%, while others, per the chart above, believe the dispartiy is even greater.

Why should we believe that the old CPI metric is better than the one we have now? Consider the criticisms the Boskin Commission made of the “old” CPI, which then led to changed to address those issues. From Wikipedia:

The report highlighted four sources of possible bias: Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change. Outlet substitution bias occurs when shifts to lower price outlets are not properly handled. Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all. New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

Of the list of four supposed problems, all but the second, outlet substitution, are completely at odds with the concept of what an index is supposed to do, which is to track the price of the same grouping of items over time. For instance, the first one says that if the initial CPI included steak once a month and steak prices rise sharply, then the index should substitute hamburger.

But even if you trust the current inflation figures, a cut to 3% reaches the danger zone. And remember that borrowers that can deduct their interest payments from taxable income enjoy an even lower effective rate.

From Bloomberg: