Nominal vs Real 3-Month Interest Rate: 1934-2008

by Catherine Mulbrandon

View Nominal vs Real 3-Month Interest Rate updated to 2010

I have plotted the 3-Month T-bills: Secondary Market rate (green line) vs the inflation adjusted (i.e. Real) 3-Month T-bills rate (orange) from Jan 1934-Sept 2008. The inflation number I used is CPI-U 3-month % change multiplied by 4.

{Click on the image to take a closer look}

Data from Federal Reserve Bank of St. Louis

[tags]United States, Interest Rate[/tags]

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Tagged as: Area Graph, CPI, Federal Reserve, Inflation, Interest Rates, Line Graph, Recessions, United States

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contulmmiv

Hello and a happy 2011. Also, congratulations on a very interesting blog.
I am trying to replicate your nominal vs. real 3-month interest rate, bringing it up to date.
For the most of it, I think I succeeded. However, there are some discrepancies between my result and your original. For example, during WWII, your real interest rate dips to nearly -40, while on my chart, it dips to only -30.
Therefore, I deduce that I am doing something wrong.
I would appreciate if you could confirm the data series you used. In my case, I used the following:
* a). CPI-U: CPIAUCNS, frequency ‘quarterly’, aggregation method ‘average’, units ‘percent change’
* b). 3-month treasury secondary market: TB3MS
* transformation: b-a*3
If you care to look at the work, it is here:
http://tinyurl.com/29d3kbl [TinyURL link to the St. Louis Fed page]
I would appreciate your take on it.
I used the same colors, for ease of comparison. The only difference is that I also drew in a light pink the CPI line.
One last thing: how did you obtain the “area” style chart for the real rate (orange)?

Sincerely, M.
Anonymous

Happy New Year to you too, I had to go back and find the original files but it looks like my formula is different from the one you linked to. I took the monthly CPI-U (CPIAUCNS) and calculated the rolling 3 month % change. Then multiplied each by 4. I subtracted this value from the monthly 3-Month Treasury Bill: Secondary Market Rate (TB3MS) to get my “real” 3-month interest rate on a monthly basis. I think the main difference is that I am multiplying my 3-month CPI % change by 4 (as in 4 qtrs in a year) instead of 3. Hope this helps.
Contulmmiv

Hello Catherine – thank you for your reply. Of course, silly me.
However, I wonder if this is the most meaningful procedure to follow. Assuming that I am the not-so-proud, ahem, owner of a 3-month bill, what would concern me is how much the payed interest is reduced by inflation for the respective duration, not the entire year. Wouldn’t this be my real interest? Thus I would subtract from the TB3MS either 3 times the _monthly_ CPIAUCNS, or a _quarterly_ average, without a multiplication factor (and herein lies my x3 factor, only that I forgot to set the frequency to “monthly”).
Just wondering… Otherwise, now the chart replicates perfectly. I noticed your update on the blog, well done. Congratulations on your work.

Sincerely, M.