Real Interest Rate

Macroeconomics
Updated Apr 2026 • Has calculator

The nominal interest rate adjusted for inflation using the Fisher equation.

What is Real Interest Rate?

The real interest rate strips out the effect of inflation from a nominal interest rate, revealing the true purchasing-power return on an investment or the true cost of borrowing. The precise calculation uses the Fisher equation: divide (1 + nominal rate) by (1 + inflation rate) and subtract one. When inflation is low, the approximation (nominal − inflation) is accurate enough; when both rates are high, only the Fisher equation gives the correct answer. Central banks focus intensely on real rates: a real rate below zero means savers are losing purchasing power even while earning a positive nominal return.

Formula

Real Rate = (1 + r_nom) ÷ (1 + r_inf) − 1

Worked Example

Worked example — US Federal Reserve / BLS — 2024

Q1 2024

Step 1  Fed Funds Rate (nominal): 5.33%
Step 2  US CPI inflation (YoY): 3.4% (BLS, March 2024)
Step 3  Real Rate = (1.0533 / 1.034) − 1 = 1.01867 − 1 = 1.87%
Step 4  → Despite a nominal rate of 5.33%, investors earn only ~1.87% in real purchasing-power terms

Source: FRED — Federal Funds Effective Rate & CPI (2024-03-31)

Calculate Real Interest Rate

Nominal rate, e.g. Fed Funds Rate or bond yield

Annual CPI inflation rate

Real Interest Rate

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Not investment advice.

How to Interpret Real Interest Rate

< 0
Negative Real Rate — inflation exceeds nominal; savers lose purchasing power
0 – 2
Low Positive (0–2%) — accommodative monetary policy
2 – 4
Neutral (2–4%) — typical long-run equilibrium range
> 4
High Real Rate (>4%) — restrictive; discourages borrowing and investment
Sources
  1. FRED — Federal Funds Effective Rate
  2. BLS — Consumer Price Index
  3. Investopedia — Real Interest Rate