Following the latest Fed cut last week, Investment News asks, "What to do with cash now that Fed has officially cut rates?" They explain, "The verdict came in as expected Wednesday. The Federal Reserve lowered the federal funds rate by 25 basis points to a target range of 3.75% to 4.00%.... Fed Chair Jerome Powell responded [to a question]: 'If you're driving in the fog, you slow down.' This comment added some intrigue to the FOMC's next and final decision scheduled for 2025, which will be made on December 9-10.... As the Fed continues to cut short-term interest rates, the high yields on cash and money market funds should grind lower. And for those investors allocating to a cash bucket to fund near-term liabilities, Brian Storey, head of multi-asset strategies at Brinker Capital Investments, suggests grabbing additional yield if possible while still focusing on the safety of the principal."
The article continues, "Jeff Corey, managing partner at Corey Wealth Partners, says it may make sense to begin extending bond maturities gradually, locking in today's yields before they decline further. 'This isn't an all-or-nothing move. We are taking a measured approach that keeps portfolios balanced while capturing the potential upside from lower rates in many situations,' Corey told Investment News, adding that investors may also benefit from price appreciation as they shift into bonds."
The piece says, "Meanwhile, Brent Coggins, chief investment officer at Triad Wealth Partners, believes the decision to tinker with their cash allocation very much depends on the client's primary objectives. 'The risk I am most leery of is duration. Given the current picture around growth, deficits and inflation, I think the long end of the curve could steepen. Chasing a little bit of incremental yield out there is just not worth it in my view,' Coggins said."
It asks, "But does it have to be cash?" Investment News tells us, "Short-duration bond funds, taxable or municipal based on the client's tax bracket, CD or treasury ladders and premium money market funds are all great alternatives to cash, according to Corey. In his view, these strategies allow investors to stay defensive while earning more income than cash alone. For medium-term alternatives, however, he is remaining cautious with credit risk and extending duration in some portfolios to benefit from the declining rate environment. Nevertheless, he recommends holding some cash even as rates fall."
He says, "Cash remains appropriate for short-term spending or large upcoming purchases, staying flexible for new investment opportunities, and maintaining an emergency reserve for changes in personal cash flow situations.... Because corporate credit spreads are near their tightest levels in two decades, the risk-reward for corporate credit today is not as attractive as it is for securitized bonds.... Additionally, he says securitized bonds tend to have a shorter duration profile, which can make them more behaviorally palatable for investors moving out of cash and who may potentially be concerned that an increase in interest rates will lead to losses in their fixed income exposure."
The article adds, "Triad's Coggins points out that 'a lot of noise' is being made about the reported $7 trillion in money market 'dry powder' reportedly waiting to be deployed into risk assets. He, for one, is skeptical of that narrative. 'Equity markets have been on a tear this year behind strong corporate earnings, secular tailwinds like AI, you name it, while other havens like gold are having record years as well. If that money was earmarked for total return, I feel like it would have happened already,' Coggins said. 'My guess is a good portion of that is due to the yield spread between Fed Funds and bank interest."
In other news, Federated Hermes' Debbie Cunningham writes on the recent Fed meeting and tokenized MMFs in "High contrast." She tells readers, "What a difference a meeting can make. The contrast between the Federal Reserve's policy-setting meeting in September and the one that ended Wednesday is striking. In the former, Chair Jerome Powell seemed to have a jump in his step as he announced the Federal Open Market Committee (FOMC) had lowered rates by a quarter percentage point with only one, very expected, dissent by White House economist turned Governor Stephen Miran for a half-point cut. Powell had rallied the troops to make a policy decision the traditional way -- based on economic data and not political pressure."
But Cunningham writes, "[Last] Wednesday, the Fed became a house divided. The decision to take the fed funds target range down another 25 basis points to 3.75-4% came with dissents on both sides: Kansas Fed president Jeffrey Schmid's call for no change countered a repeat by Miran. In Powell's attempt to explain this to the press he appeared anxious and threw considerable doubt on the likelihood of another ease in the December FOMC gathering."
She says, "He waffled between dismissing the lack of government data due to the shutdown -- claiming private data and the Fed's own surveys were sufficient -- and suggesting the lack of clarity ('fog') could slow the Fed down. He seemed to be setting the stage for a humdinger of a meeting in December. The markets have responded with confusion, seen in the drastic drop of expectations for a cut. We will re-evaluate our own forecast of a quarter-point reduction, hoping that government data will return soon. About the only thing the FOMC seemed to agree upon was that its quantitative tightening should end on Dec. 1. This was widely expected and is considered a good move by the market."
In a segment titled, "Tokens of gratitude," Cunningham comments, "With the passing of the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act in mid July, the liquidity industry has been awash with discussions about blockchain structures, stablecoins and tokens. For whatever reason, tokenized money market funds jumped to the forefront in October, with a news story or announcement seeming to come every day. For an asset class that could very well pass $8 trillion, discovering additional avenues, use cases and distribution models is newsworthy."
She adds, "As I have said before, we at Federated Hermes take a thoughtful and cautious approach to the technology. That was certainly the case this summer when we agreed to participate with BNY and Goldman Sachs in their tokenization initiative and last month we made two of our UCITS money market funds available in tokenized form via Archax, a well-known digital assets operator in the UK. It's an exciting time for the liquidity industry as it evolves into the digital asset space, in which we expect ongoing innovation and growth."
