This past week, the Chinese government announced it will be cutting interest rates one quarter of 1 percent, one of its first cuts in more than four years. As one of the world’s largest economies, China is making headlines with economists, many of whom see this decision as continued evidence for a weakening global economy.
For years, one of the traditional ways to spur growth domestically through monetary policy was to cut interest rates. The theory is that when money is cheaper to borrow, businesses will be more willing to expand, thereby helping the overall economic picture.
The U.S. began cutting rates back in 2008, when our economic worries began, and has indicated this low-rate environment will continue into 2014.
China has been able to stave off its economic concerns thus far with cheap labor, cheap goods and a currency pegged to U.S. dollar. Unfortunately, it seems that even mighty China is suffering more than it has been letting on. A move in interest rates at this point could point to some trade shortages and China’s need to cultivate more domestic growth.
While lowering interest rates might help to jump start business growth, it unfortunately hurts those living on a fixed income. Back in the U.S., traditional fixed investments such as savings accounts and CDs have dropped to near-zero rates of return and are no longer able to beat the cost of inflation.
These “lower risk” investments, in my opinion, are far less effective in today’s market. As a result, many investors find themselves wading out into unfamiliar waters as they try to find new ways to earn a return on their money during this period of historically low interest rates.
*U.S. Treasury securities are backed by the full faith and credit of the government, assuring investors of timely interest and principal payments.