What Does Inflation Mean for Business Cash Reserves?

A printing press printing sheets of $1 bills, meant to indicate that inflation will affect the value of business cash reserves

In times of rising inflation, it is even more important for businesses to ensure their cash reserves are earning a competitive return. The higher the rate of inflation, the more stagnant cash can work against you.

The Fed and many modern economists consider inflation to be a necessary component of a healthy economy. So, how can businesses implement a cash management strategy that helps to protect the purchasing power of their cash reserves?

Fed Opens the Door to Higher Inflation

The Federal Reserve has been targeting 2% annual inflation for most of the last decade. Since 2012, when that goal was publicly announced, inflation has seldom reached or surpassed 2%, despite a record length expansion and low unemployment. In response, the Fed has made some changes to its monetary policy framework.

On August 26th, Fed Chair Jerome Powell announced that the Federal Reserve would be changing its long-term stance on inflation. The announcement means The Fed will now allow inflation to run above 2% after periods of lower inflation and vice versa. Their new target will be an average of 2% inflation over the long-term.

By allowing higher inflation, central bankers can keep interest rates low for longer to continue boosting the economic recovery. In June, The Fed had already indicated their intentions to keep rates low, near the zero-lower-bound, through 2022. This latest move solidifies their intentions to keep rates low in the medium to long-term. For business, higher inflation in conjunction with lower rates means that the purchasing power of cash reserves will erode faster, and many safe investments could have negative real returns.

Higher Inflation Incentivizes Investment

When traditional riskless investments aren’t generating a sufficient return on cash reserves to overcome inflation, businesses are incentivized to put their cash to work in places where they can get more return. In many cases, this means taking on additional risk or sacrificing liquidity.

For example, a CD ladder strategy can increase returns, but those increased returns come at the cost of liquidity. Those types of sacrifices can be detrimental to the long-term success of a business, especially in uncertain economic times. Fortunately, with the advent of fintech, the days of sacrificing rate for safety are over.

Cash Management Powered by Fintech

Managing large cash reserves has traditionally been a complicated process for those businesses who need to optimize the return on their cash. First, there are the FDIC insurance limits that make it risky to leave more than $250,000 in a single bank. Then, there are the complications with finding and negotiating adequate returns. Finally, the effort required to reconcile multiple accounts and manage multiple banking relationships grows with the size of your cash reserves.

For many businesses, this process can become untenable. However, in recent years, fintech has made it easy for businesses of any size to access extended FDIC / NCUA protection and competitive returns. Our company, the American Deposit Management Co. [ADM], has developed a proprietary network of banks and credit unions that compete for your deposits. This means we can take your cash reserves and spread those funds among our network to achieve extended FDIC / NCUA protection and nationally competitive returns.

The process starts with a simple application, and then you make your first deposit into a new American Money Market Account™ [AMMA]. And don’t worry, we are not here to replace your bank, we are here to enhance it.

Earn More, Risk Less with an AMMA™ Account by ADM

Our team of cash consultants will develop a strategy to optimize the return on your cash, maintain the liquidity that you require, and ensure your cash is 100% safe. If you need next-day liquidity, or if you have planned cash outflows, we can develop a strategy that is right for your business.

At ADM, we take the work of cash management off your plate. If your business maintains a large reserve of cash, or if you are looking to reduce the work required to manage your reserves, don’t hesitate to contact us. Our team is our “secret sauce”, and we look forward to the opportunity to provide your business with safety and competitive returns.

If you’re looking for even more valuable insights on banking, interest rates, and effectively managing your business cash, be sure to check out our Insights page and follow us on LinkedInTwitter and Facebook.


*American Deposit Management Co. is not an FDIC/NCUA-insured institution. FDIC/NCUA deposit coverage only protects against the failure of an FDIC/NCUA-insured depository institution.

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