3 ms·
The relationship is pretty simple nominal_rate = real_rate + inflation_rate where the real rate is set exogenously. This implies a positive correlation betwe
by lottin 5y ago
The relationship is pretty simple
nominal_rate = real_rate + inflation_rate
where the real rate is set exogenously. This implies a positive correlation between the nominal rate and the inflation rate, which is consistent with what we observe, e.g. https://miro.medium.com/max/1400/1*b3RDeRT7rPxYEdoFnZEJRg.png https://miro.medium.com/max/1400/1*b3RDeRT7rPxYEdoFnZEJRg.pn...
- adam_arthur 5y agoInterest rates are correlated with inflation because the Fed historically raises interest rates when inflation rate is high. This is an obviously true observation and easily borne out by looking at history. Long term rates are distorted by QE right now. The market will price long term rates higher, when inflation is higher, sure. Short term rates typically set a floor on long term rates, outside of rare yield curve inversions. So not sure how your data relates. Short term rates set a floor on longer term rates, thus raising short term rates increases real rates on both fronts.
- lottin 5y agoLong-term rates are not the same thing as rates in the long run. In the short run, monetary policy can create an imbalance and move the real rate of interest temporarily, but the real rate will adjust to its natural level as markets return to equilibrium, in the medium term. This is known as the Fisher hypothesis.