Long-term trend links inflation and interest rates, debunking short-term forecasting.
The Fisher effect, which says that interest rates reflect expected inflation, is real in the long run when inflation and interest rates trend together. Short-term interest rates don't reliably predict inflation in the US postwar period. When inflation and interest rates trend, they move together, creating a strong correlation. But when they don't trend, there's no strong link between them. This study clarifies why the Fisher effect is strong in some periods but not others.