The Federal Reserve and Central Banking According to the Fisher Equation, if the Federal Reserve increases the money supply, the price level will increase. The resulting inflation will increase the nominal interest rate, decrease the real interest rate, or some combination of the two. This is known as the Fisher Effect. In the short run, increases in the money supply decrease the nominal interest rate and real interest rate. In the long run, an increase in the money supply will result in an increase in the price level and the nominal interest rate. Real and Nominal Interest Rates Year Real interest rate (%) Nominal interest rate Inflation rate (%) (%) 5.02 1.87 2 5.07 1.85 4.78 1.14 4.64 1.56 UI 5.82 2.29