Definition
A nominal interest rate is the rate you see quoted: 5% on a savings account, 7% on a mortgage. A real interest rate is that rate minus inflation. It answers the question that matters: how much more can my money actually buy after a year? If a deposit pays 5% while prices rise 3%, the real return is about 2%. If prices rise 6%, it is about −1%, even though the account balance still went up.
How it works
The relationship is known as the Fisher equation:
Real rate ≈ nominal rate − inflation
Using past inflation gives the realized (ex-post) real rate. For decisions, what counts is expected inflation, which gives the ex-ante real rate. The bond market offers a direct reading: the yield on TIPS, Treasury bonds whose principal grows with the CPI, is a real yield. This chart shows the 10-year TIPS yield. Add the breakeven inflation rate to it and you get, almost exactly, the ordinary 10-year Treasury yield.
Example
In August 2021 the 10-year Treasury yielded about 1.3% while the market expected inflation of about 2.4% a year: the real yield was around −1.1%, a record low. Lenders were paying the government, in purchasing power, to hold their money. By October 2023 the nominal yield was about 4.8% with similar inflation expectations, so the real yield had climbed to about 2.4% – a swing of 3.5 points that weighed on house prices, tech stocks and anything else valued on future cash flows.
Real interest rate in history
Readings at turning points, taken from the same data as the chart above.
| Date | Nominal 10-yr | Breakeven | Real (TIPS) | What was happening |
|---|---|---|---|---|
| Jan 2003 | 4.05% | 1.75% | 2.29% | First month of the series. |
| Nov 2008 | 3.53% | 0.64% | 2.89% | Record high: TIPS sold off in the financial panic. |
| Dec 2012 | 1.72% | 2.48% | −0.76% | Fed bond buying pushes real yields below zero. |
| Mar 2020 | 0.87% | 0.99% | −0.12% | Pandemic: real yields turn negative again. |
| Aug 2021 | 1.28% | 2.35% | −1.07% | Record low, with nominal yields near 1% and inflation rising. |
| Oct 2023 | 4.80% | 2.39% | 2.41% | Highest real yield since the 2008 financial crisis. |
| Oct 2026 | 5.13% | 2.35% | 2.78% | Latest reading. |
Monthly values; market rates are monthly averages of daily data. Explore every month on the Real Interest Rate (10-Year TIPS) chart.
Common mistakes
- “My savings earned 4%, so I am 4% richer.” Only if prices did not rise. With 3% inflation the gain in purchasing power is about 1%, and taxes are charged on the full 4%.
- “Negative rates only happen in Europe.” The Fed has never set a negative policy rate, but real US rates were negative for long stretches of the 1970s, 2010s and 2020–21.
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Real interest rate: questions and answers
Why do real interest rates matter for the economy?
Businesses and households decide on investment and borrowing based on what the money will cost in real terms. High real rates discourage borrowing and lower the value of long-term assets; negative real rates do the opposite.
What is the neutral real interest rate?
The real rate that neither stimulates nor restrains the economy, often called r-star. It cannot be observed directly; Fed estimates of the long-run value have been around 1% or a little below.