Morgan Stanley Pushes Against Cash
Morgan Stanley posted a brief titled, "Reconsidering Money Market Funds as the Fed Cuts Rates," which tells us, "With its latest cut, the Federal Reserve has now lowered its benchmark interest rate by a full percentage point since September -- and more cuts are expected. How might this affect you? If you're among the many investors with excess portfolio cash in money market mutual funds, it may be time to consider moving that money into other assets. A key reason: Yields on money market funds historically have tracked the Fed's rate path, meaning these products are likely to return less going forward. Here's what to know and how you can prepare." They write, "With the rate rise, money market assets under management have soared, totaling more than $7 trillion for the first time ever in November 2024. Now, with inflation having receded, the Fed is expected to keep lowering rates. After cutting by a half percentage point in September and a quarter point in November, Fed officials slashed the policy rate another quarter point in December to a target range of 4.25%-4.50%. Their December projections show the rate declining to around 3.9% by the end of 2025 and 3.4% in 2026 -- down markedly from the 5.4% peak reached in July 2023. That likely means returns on money market funds will drop steadily from here, as their yields historically have moved in tandem with the fed funds rate." Morgan Stanley adds, "To be sure, cash and cash equivalents like money market funds still play important roles for investors -- for example, in supporting day-to-day spending needs, savings goals and even strategic allocations in your portfolio, where such assets may act as diversifiers or risk reducers. Ultimately, the amount of money market assets you hold should reflect your personal financial goals and investment strategy—not simply what the interest-rate environment might be doing at a given moment."
