Published On: January 17, 2024
Written by: Ben Atwater and Matt Malick
The US Federal Reserve has waged a two-year war against inflation. A primary weapon in its arsenal is short-term interest rates, specifically the fed funds rate. As the Fed repeatedly hiked the fed funds rate, yields on money market funds and savings accounts followed suit. Investors took advantage of higher money market and savings rates to park their cash. Money market fund assets currently sit at a record $6.143 trillion.
Most investors need a certain amount of cash reserves as an emergency fund. But many savers have been content with attractive 5%+ money market yields, socking away cash that they might otherwise invest for longer term goals.
As terrific of a deal as short-term rates are right now, we think investors are getting too complacent with this “trade.”
It is important to remember that money market and savings account rates are variable. When the Fed reverses course and starts cutting the fed funds rate, deposit rates will also drop. With headline inflation subdued, the “fed funds futures” market currently reflects a 69.5% probability that the Fed will start cutting rates in March.
Investors with more cash than they need for their emergency funds would be wise to consider their longer-term financial goals.
Treasuries across the yield curve currently pay less than many money market funds but they still yield more than 4%. And if the Fed starts loosening the reins this year, yield will surely be harder to find.
A marked decline in interest rates also has the potential to boost stock prices, which becomes increasingly likely if investors grow impatient about stalling equity prices.
Sentiment, whether it be about cash, bonds or stocks, can shift quickly and it is best not to be where everyone else is.
If you would like to discuss the ideal level of cash reserves in your personal situation, and the best way to redeploy these funds to better reflect your long-term goals, please do not hesitate to contact us.