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Comment by boppo1 | Hacker News Reader

How does one determine the 'real' interest rate?

To parallel the other comment with a wiki leak, the short version is the risk-free interest rate (e.g. treasury bills) minus the rate of inflation.

So if you have 6% inflation, and the return on e.g. the 1 year t bill is 4.75%, you have -1.25% "real" interest rates, because your money at the end of your year of investment will be worth ~1.23% less than it was at the beginning of the year.

I'm not sure I completely agree that the result is actually as bad as that, since stuffing your money in the mattress would put you -5.5% in the hole by comparison, but still.

does that really work? inflation is a backward looking metric and interest rates are forward looking.

this is just about making a prediction of the future.

if you believe that inflation will decrease then your guaranteed rate of return from interest rates is great.

if you believe that inflation will increase or stay the same, then yes we have "negative interest rates"

I don't think it's reasonable to call it a "real" interest rate, because I can't buy T bills against it and it has no guarantees

"Real" is a term of art for something inflation-adjusted, as opposed to nominal. That's it. Scare quotes and metaphysical discussion of realness are inferring deeper meaning that isn't there. Of course you can have expectations about real interest rates: if expected real and nominal interest rates are about equal, you'd tend to feel that keeping your money under your mattress is about as attractive as keeping your money in treasuries.

"real interest rate" is also sometimes an informal way to refer to r* ("r star"), the discussion of which is definitely into metaphysical territory!

https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco...

I think the best "real" interest rate we have is the current interest rate minus inflation expectations. Central banks try to influence credit demand, and the real cost of credit is the current interest rate minus the inflation rate over some future period.

https://en.m.wikipedia.org/wiki/Real_interest_rate

Nominal interest rate = inflation + real interest rate, now your question boils down to 'how does one determine inflation?'

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