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How does an increase in money supply, due to a decrease in the REPO rate, decrease the nominal interest rate?

If an increase in money supply means more inflation, how doesn't inflation lead to inflation in the price of money market?

Meaning: Higher inflation => higher interest rates since both relate to prices.

Thanks.

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  • $\begingroup$ I think you may be confusing a few basic concepts. There is no single nominal interest rate. Speaking of the US, the rate directly affected by policy is the fed funds rate, where repo and reverse repo act as "cap" and "floor" for the fed funds market (and overnight dollar markets). It's the FEDs decision to set these rates, not money supply that affects it. Rather money supply (specifically short term supplies of reserves) adjust (temporarily) accordingly newyorkfed.org/markets/domestic-market-operations/… $\endgroup$
    – Alex
    Commented Sep 12, 2022 at 15:22
  • $\begingroup$ Hi, thanks for the answer. I was talking about nominal IRs in general. $\endgroup$
    – okman
    Commented Sep 13, 2022 at 7:18
  • $\begingroup$ If there is no single nominal interest rate, which one does the inflation affect? $\endgroup$
    – okman
    Commented Sep 13, 2022 at 7:19
  • $\begingroup$ No interest rate is directly affected by inflation. The longer the tenor the more impact inflation expectations will have on demand and supply, hence the interest rate. In general, every quoted interest rate in the economy is nominal. Feed funds, bonds, mortgages, deposits, savings accounts, credit cards, lease rates etc. In terms of bonds, increased demand for bonds increases bond prices which decreases interest rates. $\endgroup$
    – Alex
    Commented Sep 14, 2022 at 6:09
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    $\begingroup$ Also the link between overall money supply and interest rates is so weak that many central banks, including the FED, essentially do not look at money supply anymore when conducting monetary policy. This answer shows that in general interest rates decline across the spectrum if a central bank reduces rates, not the opposite $\endgroup$
    – Alex
    Commented Sep 14, 2022 at 6:14

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