Cash Resilience Amid Fed Rate Cuts: Investors Stick to Money Markets Despite Lower Yields

As the Federal Reserve prepares to cut interest rates, the era of high cash yields may be nearing its end. Despite this anticipated shift, investors continue to flock to money markets, maintaining record-high assets in this traditionally stable investment class.

In August, assets in U.S. money markets reached an unprecedented $6.24 trillion, according to the Investment Company Institute. This surge occurs even as expectations mount that the Fed will lower rates during its upcoming meeting on September 17-18. The prospect of rate cuts is likely to eventually reduce money market yields from their current levels above 5%, a significant rise from near-zero rates seen in recent years.

Vance Arnold, a 71-year-old retired teacher and baseball coach from Fayetteville, Arkansas, exemplifies the sentiment of many investors. Arnold has allocated approximately 80% of his seven-figure portfolio to money markets and cash equivalents. Despite acknowledging the potential for lower future yields, Arnold remains content with his current returns. “Money-market yields went from near-zero to 4.5%, 4.7%, and now we’re over 5.2%. I can live with 4.5% again,” he remarked.

The continued preference for cash highlights a notable shift in the investment landscape post-COVID. Assets in money markets have increased by $313 billion this year alone, according to Crane Data. This growth persists despite strong stock market performance and the anticipated Fed rate cuts. Cash is valued for its safety and liquidity, especially among retirees and cautious investors who prefer stable returns over market volatility.

Historical data reveals that cash returns an average of 2% in the 12 months following a Fed rate cut, compared to 11% for stocks and 5% for Treasury bonds. Anne Marie Stonich, chief wealth strategist at Coldstream Wealth Management, has been advising clients to transition out of cash and into assets like government bonds to lock in yields. However, many investors remain resistant to moving their funds, preferring the security of cash.

“There’s a tendency to be complacent with cash, but it’s crucial to consider moving your investments as yields are expected to fall,” Stonich said. The persistence of cash investments might be tested if the economy weakens and the Fed cuts rates more aggressively than anticipated, potentially leading to increased appeal for haven assets amid a stock market downturn.

Market watchers are awaiting U.S. employment data set for September 6 to gauge the labor market’s impact on Fed policy. Futures markets currently forecast about two percentage points in rate cuts over the next year.

Institutional investors have also contributed to the record inflows into money markets, seeking to lock in yields before the Fed’s anticipated cuts. Individual investors hold more than $4 trillion in money market funds, according to the Federal Reserve Bank of St. Louis.

Judith Astroff, a 75-year-old systems analyst from New York, has allocated 15% of her $500,000 retirement account to money markets. Although Astroff acknowledges the potential for better growth opportunities elsewhere, she remains cautious after a successful investment in Nvidia stocks. “I’m kind of terrified about buying anything else,” she admitted.

Brian Nick, head of portfolio strategy at NewEdge Wealth, believes that convincing clients to diversify away from cash will be key as yields decline. “You have to show investors a compelling reason to move from money markets to other assets that offer better opportunities,” Nick said. “That will be the approach that eventually wins out.”

As the Fed’s policy moves loom, the resilience of cash in investor portfolios underscores the cautious optimism that continues to influence the investment landscape.