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Real Interest Rates and Why They Matter

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Interestrate News

Fed,Macroeconomics,Prices

Since the Federal Reserve started raising interest rates, investors have enjoyed higher yields on cash socked away in money market accounts and bonds.

Higher yields have created some headwinds for gold as well. Since gold is a non-yielding asset, many people assume they will do better with bonds, or even putting money in a savings account. But it's important not to take the interest rates you see advertised at face value. You need to determine the real interest rate before you make an investment decision.

The government revised the CPI formula in the 1990s so that it understates the actual rise in prices. Based on the formula used in the 1970s, CPI is closer to double the official numbers. So, if the BLS reports a CPI of 3 percent, under the old formula, you'd be looking at CPI closer to 6 percent. If you fail to grasp the concept of real interest rates, you can easily get fooled by media headlines.

 

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