When the US Federal Reserve changes interest-rate policy, Cayman feels it almost immediately. Cayman’s financial system is US-dollar based, its mortgage and corporate lending rates are priced off US benchmarks and most investment portfolios held locally are ultimately anchored to US capital markets.
Since late 2024, the Federal Reserve has reduced the federal funds rate by approximately 175 basis points, reflecting a clear shift away from restrictive monetary policy toward a more accommodative stance to support economic growth, rather than in response to a collapse in activity or employment conditions. US inflation has moderated meaningfully, while productivity, corporate earnings and capital investment particularly in technology, energy and infrastructure remain resilient.
Broad forecasts for AI-related capital expenditure in 2026 suggest hyperscaler capex alone could approach or exceed US$600 billion. This supportive backdrop, alongside moderating price pressures, has underpinned continued business investment and equity market strength.
Policy is shifting from restrictive back toward neutral, yet headlines around geopolitics, tariffs and central-bank politics continue to unsettle investors. Volatility makes sitting in cash feel comforting but in reality, it is becoming costly.
This is where the paradox of lower rates begins.
Two sides of the same coin
Lower interest rates are a powerful stimulus for the real economy. Mortgages become more affordable, corporate interest expenses decline and cash flow improves across households and businesses. Investment, hiring and construction tend to recover, while financial stress and default risks recede.
Yet the same rate cuts that help borrowers quietly undermine savers.
As short-term yields fall, bank deposits, money-market funds and short-dated bonds generate less income just as the cost of living continues to rise. Healthcare, education, insurance and housing are all becoming more expensive and global trade frictions including US tariffs are adding upward pressure to the price of imported goods and services. For an import-dependent economy like Cayman, these inflationary forces are felt directly at the checkout, in medical bills and in school fees.
This is the defining tension of the current cycle: money is cheaper to borrow, but increasingly expensive to hold in cash and cash equivalence.
Why cash is losing its edge
Even though interest rates remain higher than they were before the pandemic, they are no longer keeping pace with the true cost of living. In the US, healthcare costs alone are expected to rise roughly 7.5%, far exceeding what three-month Treasury bills or money-market funds are likely to deliver. At the same time, tariffs, supply-chain reconfiguration and the reshoring of manufacturing are pushing up the cost of everything from consumer goods and medical equipment to construction materials and machinery. These forces create a form of ‘sticky inflation’ that persists even as headline inflation moderates.
For Cayman, these pressures are amplified. As an import-dependent economy, most goods, building materials, food, vehicles, medical supplies and even educational resources are sourced from overseas, primarily the United States. Any weakening of the US dollar increases in freight costs, or trade-related price hikes are passed through directly into local prices. What looks like a modest inflation rate in the US often feels higher on the ground in Cayman.
Against this backdrop, cash earning 3% to 4% may appear safe, but it is quietly falling behind. In real terms, the purchasing power of cash is shrinking year by year, even if account balances do not decline on paper. The danger for investors is therefore not market volatility, it is inertia: staying in yesterday’s strategy while tomorrow’s economic reality steadily erodes the value of their money.
Where capital should be working
Historically, a combination of easing monetary conditions and ongoing growth has been supportive of financial markets. In a lower-rate regime, capital tends to move toward assets that benefit from falling borrowing costs and rising economic momentum.
In equities, this favours companies with strong balance sheets, pricing power and durable earnings. US large-cap and mid-cap companies stand out because they are directly exposed to productivity gains, technology investment and domestic growth.
In fixed income, the opportunity shifts away from ultra-short maturities toward high-quality investment-grade bonds, mortgage-backed securities and municipal bonds, where investors can lock in income while benefiting from price support as yields drift lower.
Real assets also deserve attention. Gold and precious metals have historically performed well when real interest rates fall, central banks remain buyers and geopolitical risk stays elevated. They act as a hedge against inflation and currency debasement.
What matters most in this environment is discipline. Chasing yield in weak credit such as subprime consumer lending is risky as financial stress emerges in vulnerable segments. Quality, diversification and resilience should remain the guiding principles for investors.
A Cayman-relevant strategy
For Cayman households, businesses and investors, this shift matters not only because borrowing has become cheaper, but because it fundamentally changes how wealth must be invested. Falling US rates will support local borrowing and asset values, but they will also compress deposit and money-market returns. Meanwhile, inflation driven by healthcare costs, imported goods, tariffs and global supply chains will continue to eat into purchasing power.
Simply sitting in cash is no longer a strategy. Portfolios that combine US and global equities, high-quality bonds and select real assets offer a far better defence against rising costs and a far stronger platform for long-term growth.
A strategic conclusion
Lower short-term rates mark the beginning of a new investment phase. They reduce financial stress, encourage capital formation and create fertile ground for earnings growth but they punish complacency.
Cash is no longer a destination. It is a temporary holding place between opportunities.
In this new era, wealth will belong to those who move beyond liquidity and into productive assets that can compound, generate income and keep pace with inflation. The real risk is not market volatility. It is allowing purchasing power to quietly fade while the global economy moves on.
Richard Maparura, CFA, CA, is the Chief Executive Officer of RF Bank & Trust (Cayman).
Disclaimer: The views expressed are the opinions of the writer and, whilst believed reliable, may differ from the views of RF Bank and Trust (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.
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