Forbes Says Cash Is King for Now
Forbes recently published the article, "Where To Invest: Cash Is King for Now." Contributor Nick Sargen tells us, "One question I am increasingly asked by people is where they should deploy their funds amid the uncertainty about the economy and financial markets. My response is that for the first time in more than a decade, investors are being paid to park their spare cash in money market instruments. The reason: With the Federal Reserve boosting the federal funds rate by 25 basis points to 5.0%-5.25% at the May FOMC meeting, investors can now earn about 5% on money market funds (MMF), which compensates them for inflation. While investors could also place money in bank savings accounts, their deposit rates are considerably below MMF rates. For example, the average rate on savings accounts nationwide according to Lending Tree is only 0.37%, although there is a wide variation among individual banks." He continues, "Until recently, banks were slow to increase rates as the Fed tightened monetary policy because they thought deposits were sticky. According to a report by the Federal Reserve Bank of New York, the response of retail three-month CD rates to changes in the effective federal funds rate (called the deposit beta) has been much lower than that for money market funds.... However, banks began to lose deposits as the Fed tightened policy aggressively, and the pace of outflows has accelerated with the failures of regional banks such as Silicon Valley Bank, Signature Bank and First Republic Bank. According to research from Crane Data, investors have poured more than $400 billon in money market funds during March and April. These inflows have boosted their total assets to a record of more than $5.7 billion." The piece adds, "More recently, a growing number of banks and asset managers have responded by offering more attractive rates on CDs, with some CDs now topping 5.00%. These instruments are similar to savings accounts in that they carry protection up to $250,000 per individual. However, the holder cannot touch the instrument for a designated period -- whether for a few months or up to five years or more. In this respect, they are less liquid than money market instruments.... My take is that while the Fed may pause in raising rates now, it will be very reluctant to lower them as long as inflation is well above the Fed's 2% average annual target.... Now, for the first time in a long while, investors are being adequately compensated for holding more predictable and less-risky assets. This is especially important for retirees and low-income earners who cannot bear the risk of market fluctuations.... In these circumstances, it is understandable that many investors are uncertain about what to do with spare cash. Fortunately, they can finally earn a reasonable return on their cash holdings now."
