Real Interest Rates

Real Interest Rates

Today’s Fed Funds Rate (2%) is the rate which depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis.

Todays inflation rate is 2.2%

That adds up to real interest rate of -.02%

For investors, the real rate is the nominal rate that funds can be borrowed, less the rate of inflation.

Say on a 30 year mortgage, the nominal rate is 4%

Take away inflation of 2.2%

And the income tax deduction est 30%

The interest rate is reduced to 2.8%

Take away inflation of 2.2%

So, the real rate is .6% to own a home.

This is the main reason for the appreciation in home values, and stock values.

Dave W