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Why did the composite rate for I bonds issued drop to 6.89% from 9.62% when the Fed has been increasing interest rate? What is the correlation between I bonds rate and Feds fund rate?

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    The actual rate of interest for an I bond is a combination of the fixed rate and the inflation rate.
    – AKdemy
    Jan 3, 2023 at 11:27
  • What are "I bonds"? United States Series I bonds? Jan 4, 2023 at 17:13

2 Answers 2

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I Bond rates are linked to current inflation (which has been falling since June), while the Fed increases interest rates in the hope that inflation decreases more in the future*.

https://www.rateinflation.com/inflation-rate/usa-inflation-rate/ enter image description here

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  • That's the trade-off of I bonds. You give up the promise of a guaranteed rate if return in exchange for the promise that the rate should stay safely above inflation.
    – keshlam
    Jan 3, 2023 at 14:44
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    What do you mean by "You give up the promise (what promise?) of a guaranteed rate if return in exchange for the promise that the rate should stay safely above inflation?" Jan 3, 2023 at 19:08
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    @HelloDarkWorld most bonds are fixed rate. You know that you will get a specific return for the life of the bond. Not so with I Bonds and TIPS, which are variable rate.
    – RonJohn
    Jan 4, 2023 at 13:36
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You can look here for the actual data. The bond pays a fixed rate and adjusts for inflation so that your real return is always exactly equal to the fixed rate. That rate is established by the Secretary of the Treasury for the life of the bond without any published rules and not influenced much by the Fed Funds Rate. For example, it stayed at zero from 2020 until November 2022, although the FED increased rates significantly to 3.75% to 4.00%.

enter image description here

The values are computed as shown below. enter image description here

This answer explains why the formula

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

is designed like that.

See TreasuryDirect for details about I bonds.

This answer shows how the semi-annual inflation rate is computed from CPI-U data.

This answer replicates the calculation of the current value on the website of TreasuryDirect.

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    Thank you so much for the detailed calculation! I just don't have enough reputation to upvote your answer! Jan 3, 2023 at 18:53
  • no worries, glad it helped
    – AKdemy
    Jan 3, 2023 at 18:59

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