Glossary · Bonds and rates
Real interest rate
The real interest rate is the interest rate minus inflation: how much faster your money grows than prices. It can be negative.
Also called: real rate, inflation-adjusted interest rate, real yield
What investors are promised above inflation, Oct 2026.
Fed funds 3.75% − inflation 3.7%, Sep 2026.
In plain words
Your bank pays you 5% a year. Sounds good, but if prices also rise 5%, your money buys exactly what it did a year ago: you are no better off. The interest rate after taking out inflation is the real interest rate, and here it is zero.
The quick formula: real rate ≈ interest rate − inflation. Earn 5% while prices rise 2% and the real rate is about 3%. Earn 2% while prices rise 5% and it is −3%: your savings lose buying power even as the balance grows.
In Sep 2026, the federal funds rate was 3.75% and consumer prices were up 3.7% on a year earlier, a real rate of about 0.0%. Investors in 10-year inflation-protected Treasuries were promised 2.78% above inflation (Oct 2026).
Example
$10,000 in savings for one year
- The account pays 4%: after a year you have $10,400.
- Prices rose 6% over the year: what cost $10,000 now costs $10,600.
- Your $10,400 buys what $10,400 ÷ 1.06 = $9,811 bought a year ago.
- Real return: about −1.9%, close to the shortcut 4% − 6% = −2%.
The exact formula is (1 + interest rate) ÷ (1 + inflation) − 1; the shortcut works well when both are small.
One level deeper
Economists separate two versions. The backward-looking real rate uses inflation that already happened (the rate minus last year’s inflation). The forward-looking one uses the inflation expected ahead, which is what matters for decisions; the best market reading of it is the yield on inflation-protected bonds.
The real rate decides who wins and who loses. When it is negative, borrowers gain and savers lose, a quiet transfer of wealth. Since 1955, the real federal funds rate was below zero about 33% of the time, reaching −8.4% in Mar 2022. Its high was +9.4%, in Jun 1981.
Central banks steer the real rate, not just the nominal one: to cool an economy they push their rate above inflation, and to support it, below. Economists also talk of a “neutral” real rate (often called r-star) that neither speeds the economy up nor slows it down; nobody can observe it directly.
US real interest rates since 1955
Two interest rates minus inflation over the previous 12 months. Both went deeply negative in the 1970s and again in 2021 and 2022, when inflation outran interest rates, and were highest in the early 1980s.
The numbers behind the chart
| Date | 10-year Treasury minus inflation | Fed funds rate minus inflation |
|---|---|---|
| Jan 1955 | 3.2% | 2.0% |
| Dec 1960 | 2.5% | 0.6% |
| Dec 1970 | 0.8% | −0.7% |
| Dec 1980 | 0.5% | 6.5% |
| Dec 1990 | 1.8% | 1.1% |
| Dec 2000 | 1.8% | 3.0% |
| Dec 2010 | 1.9% | −1.2% |
| Dec 2020 | −0.4% | −1.2% |
| Dec 2022 | −2.8% | −2.3% |
| Dec 2023 | 0.7% | 2.0% |
| Dec 2024 | 1.5% | 1.6% |
| Dec 2025 | 1.5% | 1.1% |
| Sep 2026 | 1.3% | 0.0% |
Why it matters
It decides whether saving pays: only a positive real rate makes money grow in buying power.
It is what really matters for borrowers too: a 7% loan with 7% inflation is cheap; a 4% loan while prices fall is dear.
It shows the true stance of monetary policy: a 5% key rate is tight with 2% inflation but loose with 8%.
A common mistake
Myth: Higher interest rates are always better for savers.
In fact: What counts is the rate after inflation. A 10% rate with 12% inflation leaves savers poorer; a 3% rate with 1% inflation leaves them richer. Since 1955, the Fed’s own rate was below inflation about 33% of the time.
Questions people ask
How do you calculate the real interest rate?
Subtract inflation from the interest rate: 5% − 3% = about 2%. Exactly: (1 + 0.05) ÷ (1 + 0.03) − 1 = 1.94%.
Can real interest rates be negative?
Yes, whenever inflation runs above the interest rate. The real federal funds rate fell to −8.4% in Mar 2022, and the 10-year TIPS yield was below zero for about 4 years in all since 2003.
What is the real interest rate now?
In Sep 2026: about 0.0% for the Fed’s key rate after 3.7% inflation, and +1.3% for the 10-year Treasury yield. The market’s forward-looking 10-year real rate, from TIPS, was 2.78% in Oct 2026.
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About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US recessions (NBER business cycle dates): National Bureau of Economic Research (NBER), Business Cycle Dating Committee: US Business Cycle Expansions and Contractions.
- Effective federal funds rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series H15/H15/RIFSPFF_N.D (Federal funds effective rate), Data Download Program. The EFFR is subject to the Terms of Use posted at newyorkfed.org. The New York Fed is not responsible for publication of the EFFR by BigCapital, does not sanction or endorse any particular republication, and has no liability for your use.
- Consumer price index, all items (CPI-U): U.S. Bureau of Labor Statistics, Consumer Price Index, series CPIAUCSL; retrieved from FRED, Federal Reserve Bank of St. Louis.
- 10-year inflation-protected Treasury (TIPS) yield: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series FII10; retrieved from FRED, Federal Reserve Bank of St. Louis.
- US Treasury par yield curve rates: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates (Interest Rate Statistics).
- S&P Composite (price, dividends, earnings, CAPE), US consumer prices and the 10-year Treasury rate: Robert J. Shiller, Online Data (shillerdata.com).
- The 10-year Treasury yield is GS10 before 1990 and the monthly average of the Treasury’s daily par yield since; inflation is the 12-month change in the seasonally adjusted CPI-U.
- This page explains a term. It is not investment advice.