Low Interest Rates Can’t Keep Up With Inflation

With a federal funds rate at 2.25 percent, the lowest since 2005, investors are faced with receiving interest on their short-term investments that may not even outpace inflation. This presents a pitfall for investors who may be tempted to take on riskier investments or longer-term investments to make up for lost yield.

It is important to remember that the Fed reiterated during its meeting that “downside risk to growth remains,” suggesting that they may be forced to cut rates further. While we may be nearing the bottom, low interest rates for extended periods of time tend to create an environment of higher inflation which would eventually force the Fed to ratchet interest rates back up.

Because of this, investors should resist the temptation to lock up low interest rates for long periods of time, instead focusing on maintaining the flexibility and liquidity to react to the changing economic environment.