Fisher Effect

See: Fisher's Separation Theorem.

The Fisher Effect theorizes the basic relationship between nominal interest rates and real interest rates.

TL;DR on those: nominal interest rates are the actual numbers, while real interest rates you can compare across time. For instance, a bottle of milk used to cost $0.50, but now it costs $3.00. Those numbers are “nominal.” If we wanted to compare the “real” cost, we’d need to adjust for inflation and use the “real” costs.

The Fisher Effect states that real interest rates are equal to nominal interest rates minus the expected inflation rate. This basic mathematical relationship implies that, as inflation increases, the real interest rate falls. Just like if you put a $20 bill in your sock drawer in the early 90s and it can’t buy you as much today as it could in the 90s, because of inflation.

For real interest rates to stay stable, nominal interest rates must be equal to inflation. But what investor wants that? Investors was a real increase in their money, so they want an increase in real interest rates. When the nominal rate is higher than inflation, it means the real interest rate is increasing.

While relevant to all investors on a microeconomic scale, the Fisher Effect has also been used in macroeconomics to analyze the money supply of nations. Go fish.