Retirement planning is challenging enough when all the “rules” remain the same. However, investing can feel even more uncomfortable when social or economic conditions shift and create a sense of uncertainty.
But are those feelings justified or should investing – particularly cash investments like money market accounts, CDs and treasury bonds – remain business as usual regardless of the situation?
Financial advisors and wealth managers go through considerable education to learn the regulations and strategies for finding the best return on your investment. That strategy depends on a variety of factors.
The right approach for one person might not be advisable for the next, and so on. The key is to identify your goals, timeline, budget, and risk tolerance. Then apply those parameters to choose the best mix of investments to reach those goals.
That said, there are some fundamentals about how the economy works that can help us answer those questions and deliver reassurance with your investment decisions.
Cash Investments
It should not surprise anyone that in banking, decimal points matter. When you’re calculating annual percentage yield (APY) on bank deposit balances, shifting between digits can mean the difference between an annual return of $100 or $1,000.
My banking career began in 2012, a high-water mark for the decimal point’s posture in quoted return. The first time a customer inquired about our 13-month Certificate of Deposit (CD) special, I did a double take – was that a 3.5% APY? No – in fact it was 0.35% APY. For anyone opening this CD, they realized a “special rate” of one-third of one percentage.
In more recent years, cash savers have been much more fortunate. Since 2022, for example, depositors have enjoyed “risk-free annual returns” of between 3-5%. (By definition, the risk-free rate of return is the hypothetical return on an investment with zero-risk of financial loss. Typically, it is a stand-in for the yield on a 3-month Treasury bill. On September 15th, 2025, for example, that yield was 3.91%.)
We know that inflation plays a role here, with the Federal Reserve raising interest rates to slow the economy and reduce price pressures. Since 2022, year-over-year price increases have dropped significantly, from a peak of roughly 9% to 2.4% as of May 2025. That means inflation is closing in on the Federal Reserve’s goal of 2% per year. If the Federal Reserve reduces interest rates or keeps them constant, the natural question is “where are cash returns headed?”
In other words, are cash investments like money market accounts, CDs, and Treasury investments still attractive?
How does the Fed affect economic conditions?
Before we can answer that question, we should understand how and why the Federal Reserve alters interest rates.
The Federal Reserve – often called the Fed – was created in 1913 in response to a bank run in 1907. Fear quickly spread in financial markets, with consumers withdrawing deposits, and loans drying up. Congress and bankers like JP Morgan recognized the need for a central bank to step in and provide confidence to consumers and businesses.
Today, the Federal Reserve acts as a lender of last resort and has since been tasked with two primary objectives:
- Keep prices stable
- Maximize employment
It does this by controlling the amount of U.S. dollars in circulation at any given time. All else being equal, when the money supply is reduced, interest rates rise and economic conditions tighten. When the money supply is expanded, interest rates decline and economic conditions become more favorable.
So how does the Fed control the money supply? Here are the primary tools at their disposal:
- The Fed can change the amount of dollars that banks are required to hold in deposit reserves. A higher Reserve Requirement would mean less money available in the economy and a tighter money supply, leading to higher interest rates.
- The Fed can buy or sell long-term US Treasury bonds. By adding or removing these investments from its balance sheet, they add or remove money in the economy. When the Fed buys a US Treasury bill, they send dollars out into the economy, expanding the money supply and lowering interest rates. This is called Quantitative Easing and/or Tightening (QE or QT).
- Perhaps the most discussed tool the Fed uses is the Fed Funds Rate (FFR). Occasionally, banks borrow from each other to meet the Fed’s reserve requirement, and when they do, the rate charged on this overnight loan is the FFR. This rate controls the price of money and indirectly affects consumer and business loan rates. When the Federal Open Market Committee (FOMC) meets, they set a rate target. So, when the FFR is lowered, interest rates go down, banks can lend more cheaply, therefore the money supply expands.
Currently, the federal funds rate (FFR) remains elevated, although interest rates have declined since peaking in mid-2023. Around that time, inflation dropped to approximately 5% year-over-year, and real returns turned positive. Certificates of deposit (CDs) were offering annual yields around 5%. As of now, CD rates range between 3% and 5% annually, with real returns estimated between 0.5% and 2.5% per year.
Choosing your investment strategy
That brings us back to our original questions:
- Is this a good return?
- Should current conditions affect my strategy?
Putting my financial planner hat on, it’s important to stress that your risk tolerance and plans for the funds are vital pieces of the puzzle. Ask yourself who the money is for and when it is needed.
If you are saving for a home purchase and plan to use the funds within 1-2 years, keep your money in a cash investment. If you cannot stand the idea of your investment falling below the original value, then a CD or some rough equivalent is right for you. Explore a fixed interest rate investment when you are confident funds will be needed by an exact date.
Conversely, if your time horizon is longer than 1-2 years and you have simply been parking funds waiting to see where the economy is headed, you may want to consider alternatives.
As of this writing, several Fed Board Governors have signaled an openness to lowering FFR. While the job market remains robust, consumer sentiment is near historic lows, and geopolitical risk remains a potential factor. Even if the Fed keeps rates constant and inflation remains at its current level, an average 1-2% per year real return may not be sufficient to meet your goals.
If you would like help sorting through the various factors that help determine your personal investment strategy during an uncomfortable investment environment, contact the Wealth Management experts at Lake Ridge Bank at (608) 826-3570.
Investment Products: Are Not FDIC Insured | Are Not Bank Guaranteed | May Lose Value
