The Fisher Hypothesis

The relationship between nominal interest rates and the rate of inflation is often couched in terms of the Fisher hypothesis, which is named for the famous economist Irving Fisher, who first formally proposed it in 1930. The Fisher hypothesis simply asserts that the general level of nominal interest rates follows the general level of inflation. According to the Fisher hypothesis, interest rates are on average higher than the rate of inflation. Therefore, it logically follows that short-term interest rates reflect current inflation, while long-term interest rates reflect investor expectations of future inflation.