How to Stay Ahead of Inflation When the Fed Is Fighting Your Every Move

Posted by Metals Corporate on

How to Stay Ahead of Inflation When the Fed Is Fighting Your Every Move

By Bryan Ellis

Words like “inflation” and “rising interest rates” make most investors feel a little nervous, but more and more financial analysts are concluding that a few interest-rate bumps could be a positive thing for many Americans.

While rising interest rates could make it slightly more expensive to buy a home (although interest rates could rise several points before fully departing from the “historically low” category), analysts say that if interest rates do not rise soon, many investors who rely on low-risk investment vehicles like money market accounts, certificates of deposit (CDs), and savings accounts could suffer irreparable harm.

Historically, interest rates in these low-risk accounts could expect to earn enough interest to stay ahead of or, at a minimum, even with the rate of inflation, but in recent years that has not been the case.

In fact, since the Fed implemented its first round of quantitative easing (QE) in response to the Great Recession, artificially depressed interest rates have failed to keep up with the prevailing rate of inflation. That is fantastic for homebuyers, but it translates to $1.5 trillion in lost purchasing power in the last decade for deposits in U.S. banks.

The past three years in particular have been very hard on this capital, with nearly half of the total loss of purchasing power of the last decade occurring in between 2016 and 2019. Although the Fed has raised interest rates several times since 2016, the hikes have not been sufficient to ameliorate depositors’ losses.

Low interest rates and few or no rate hikes are likely to be long-term trends. The Federal Reserve announced at the end of March 2019 that it would likely not raise rates at all during 2019, bringing an end to five quarters of consecutive rate increases. Most officials believe there might be one rate increase in 2020 and perhaps none at all in 2021.

As long as inflation remains below 2 percent, there is no guarantee that interest rates will rise at all, and some analysts believe May’s lackluster jobs report, which posted low unemployment but a relatively small 75,000 jobs created, could result in a rate cut as early as July.

If your preferred low-risk, long-term investment vehicles are suffering during this prolonged period of low interest, you may be looking for options to help you keep up with inflation. However, investors with very low risk tolerance often have little appetite for traditional stock investments or alternative assets.

The exception to this, however, is precious metals investing. Investors who purchase gold, silver, or other metals like palladium are able to enjoy the peace of mind that comes with owning a metal that is often referred to as an “inflation hedge” and a “crisis hedge” while knowing that in the event the economy does soften, the value of their investment will almost certainly rise.

In fact, during the last recession, the price of gold actually rose 24 percent! The gold market was volatile at times during the recession, but it never lost anything close to the value that most stock portfolios lost during the same time period.

If you are starting to feel like the Fed’s interest-rate policy is literally leaving your investments behind, then consider diversifying without introducing a new headache to your portfolio. Adding precious metals to the mix meets your appetite for low-risk investment options, and you should also regularly check in with your banker to make sure you are getting the best rates possible.

In March 2019, the FDIC posted the average money market rate at 0.18 percent, but persistent investors reported landing rates higher than the prevailing rate of inflation at that time: 1.9 percent. By doing their research, they were able to snag a rate about 10 times higher than the “norm.” Remember: Low risk does not have to mean locked in, and low interest rates should not spell the end of your portfolio’s returns.


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