Fixed Income Investments: The Risks

 The fixed-income market is also exposed to changes in inflation. This risk is related to the Federal Reserve's goals for interest rates. When the Fed is trying to stimulate the economy, it raises interest rates. When the Fed is trying to slow the economy, it lowers interest rates.

The risk of inflation is also important to consider when investing in fixed-income securities. The Federal Reserve's goal of maximum employment, which is expressed as a measure of inflation, is a key component of the fixed-income market. The inflation rate is measured by the Consumer Price Index for All Urban Consumers, which is a measure of the prices of goods and services purchased by a representative sample of U.S. households. When the inflation rate is at the Fed's target level of 2% or above, investors can expect to see higher interest rates and stronger demand for fixed-income securities.

The fixed-income market is also exposed to changes in inflation. The Federal Reserve's long-standing target for the federal funds rate is designed to keep the inflation rate within a target range. When the market is at its strongest, investors have few concerns about inflation; as the market becomes more volatile, investors' concerns about inflation increase. This is particularly true in today's low-interest rate environment.

The most important risk facing investors today is the increased volatility in fixed-income securities. When the market was at its strongest, investors had little need to worry about interest rates and other traditional risks in fixed income. But now, with the market experiencing its most volatile stretch in decades and interest rates at historic lows, investors are finding themselves needing to adjust their exposure to fixed income. The volatility in fixed-income securities can cause investors to lose confidence in the market.

The risks of inflation are also significant in the fixed-income sector. When inflation is high, investors have to worry about the value of their fixed-income investments. When inflation is low, investors can feel comfortable holding their fixed-income investments. The inflation risks in the fixed-income market are the result of changes in the Federal Reserve's monetary policy.