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No Escape from Low Rates (Part 1)

It was once unthinkable that interest rates would remain as low as they have for as long as they have.

Alex Bryan 16.01.2020

Interest rates influence the prices and expected returns of nearly every investment. Low and falling rates tend to inflate asset prices but reduce their future returns. That makes investors feel richer today but increases the challenge of growing wealth and generating income in the future. Rising rates have the opposite effect.

It was once unthinkable that interest rates would remain as low as they have for as long as they have, or that the Federal Reserve would cut the federal-funds rate below 2% with unemployment below 4%. While it's tough to predict what will happen to interest rates, investors shouldn't count on rates reverting to their historical norms. They can remain low for a long time, particularly when inflation expectations are low, as they are now. In Japan, short-term rates have been below 1% for more than 20 years.

There's nothing you can do to change interest rates or easily overcome the challenges low rates create. It's better to adjust expectations about the returns your investments can offer and determine whether they provide sufficient compensation for their risk.

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About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA is the Director of Passive Fund Research with Morningstar.

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