By Suzanne McGee and Carolina Mandl
(Reuters) – Investment advisers are urging clients to unload their hefty cash holdings as the Federal Reserve begins its long-awaited rate cut, a process they expect will limit the appeal of money market funds in the months ahead.
Retail investors’ assets in money market funds have grown by $951 billion since 2022, when the Fed began its cycle of rate hikes to curb inflation, according to the Investment Company Institute, which represents mutual funds. Their assets were $2.6 trillion as of Sept. 18, about 80% higher than at the start of 2022. Total money market assets were $6.3 trillion.
“As investors become increasingly confident that the Fed will cut rates in line with its guidance, they are likely to look for yields that won’t fall overnight,” said Hannes Hofmann, head of the family office group at Citi Private Bank, adding that risk appetite is likely to increase.
The U.S. central bank on Wednesday cut the federal funds rate by 50 basis points, a wider than usual range of 4.75% to 5%, making it less attractive to hold money in deposit accounts and cash-like instruments.
“You’re going to have to shift everything … further up in the amount of risk you’re going to accept,” said Jason Britton, founder of Reflection Asset Management in Charleston, which manages or oversees about $5 billion in assets. “Money market assets are going to have to become fixed income investments; fixed income is going to have to move into preferred stocks or dividend-paying stocks.”
Money market funds — ultra-low-risk mutual funds that invest in short-term Treasury securities and other cash proxies — are one way to gauge investor appetite for the nearly risk-free returns they offer. When short-term interest rates rise, money market yields rise with them, making them more attractive to investors.
“Investors may need to look at something else, or something longer-term, to lock in rates and be less sensitive to Fed rate cuts,” said Ross Mayfield, investment strategist at Baird Wealth.
Some investors may eventually shift money from money market funds into stocks, advisers say. Daniel Morris, chief market strategist, BNP Paribas Asset Management, said the appeal of money market funds will wane. Morris said he sees better opportunities in equities and is slightly overweight equities versus fixed income.
Carol Schleif, Chief Investment Officer of BMO Family Office, expects investors to hold onto some cash in anticipation of opportunities to buy shares.
It may take some time for the first reactions to Wednesday’s Fed decision to show up in money market fund flows, as it has been difficult to convince retail investors to give up their cash holdings, analysts noted. Assets in money market funds typically peak nine months after the first rate cut, BofA Securities said in a report.
“If people see a broader rise in stock prices, they might move their money faster, because that would mean owning riskier assets is a good thing,” said Christian Salomone, Chief Investment Officer of Ballast Rock Private Wealth.
According to Britton, investors are “caught between a rock and a hard place” and must choose between investing in riskier assets or earning lower returns on cash products.
(Reporting by Suzanne McGee and Carolina Mandl; additional reporting by Davide Barbuscia; Editing by Megan Davies, Rod Nickel and Nick Zieminski)
