This may not be an era in which Americans are awash in physical currency fattening their wallets, but we are awash in cash parked inside accounts that have been generating attractive yields thanks to Federal Reserve interest rate hikes to combat inflation. There is a record amount of cash in money market funds, roughly $7.6 trillion, according to Crane Data.
But as the Federal Reserve prepares to cut rates for the first time in a year, maybe by as much as 50 basis points — a policy shift that will, over time, reduce the yields on risk-free cash-equivalent investments — market attention has shifted to whether that cash will be on the move. At the most extreme, Wall Street’s so-called “wall of cash” theory — which claims that all that cash on the move can create its own stock market rally — has been debunked about as many times as it has been offered.
At the very least, it is a significant moment of change in Federal Reserve rate policy. The latest jobs market data confirmed mounting fears of a labor market heading in the wrong direction and the need for the central bank to move sooner rather than later before unemployment spikes. Meanwhile, the latest inflation data, while far from an all-clear on pricing pressures throughout the economy, did not suggest the Fed will hold off on at least a 25 basis point rate cut next week.
The payrolls data “cinches the case for a rate cut,” said Investment Company Institute Chief Economist and lead ETF researcher Shelly Antoniewicz earlier this week on CNBC’s “ETF Edge.”
In line with most market experts and economists, she said the pace of those cuts will remain data-dependent as the Fed watches both the labor market and inflation, and manages its dual mandate of full employment and price stability. But she added on the podcast portion of ETF Edge that as the Fed starts to lower rates, the roughly $7 trillion “sitting in money market funds” will gradually flow into more risk-on assets, including stocks and bonds, as savings rates become less attractive.
To be sure, more mutual fund companies are going to be chasing those assets on the precipice of a huge decision from the Securities and Exchange Commission which could allow every asset management company to offer an ETF share class of their funds. Antoniewicz noted that there are 70 applications in with the SEC for exemptive relief and the ICI, the main mutual fund industry trade group, is working with hundreds of fund sponsors to be prepared to add an ETF share class if the SEC says “go.”
While all that may be true, Peter Crane, president and publisher of money fund research firm Crane Data, has heard it all before, at least when it comes to the Fed and money market funds, and he has a simple response: money fund assets just keep growing, and the only times in recent history when they’ve gone down as opposed to up is when rates are literally at zero during periods of economic calamity.
“The rates matter but much less than most people believe,” Crane said.
In fact, in the 52-year history of money market funds, assets have only gone down after the dotcom bust and financial crisis, periods where intense economic stress led to rock-bottom rates, a “bottom of the rate cycle nailed to zero,” he said.
If things get bad enough in the economy that the Fed has to cut more aggressively sooner rather than later, that’s not exactly a sign of a market where investors are likely to be overly aggressive with their own risk profile, either.
“Dream on Wall Street,” Crane said. “It makes for a good talking point, but the $7 trillion is not going anywhere but up.”
There has also been a shift over time in the usage of money market funds, with what was once mostly a retail investor phenomenon now majority institutional and corporate cash — roughly 60% of the market, according to Crane’s data. “They are not moving, no matter what,” he said. “They are not going into the stock market.”
It’s not that money fund researchers like Crane deny that lower rates matter, or that some of the money fund assets may indeed move to higher-risk, higher return areas of the market — he thinks that is maybe 10% of the $7 trillion-plus, though he adds there is no precise data to rely on for such an estimate.
But when you consider the roughly $20 trillion that Americans leave in bank deposits, basically giving their money to Wall Street to go off and make more money on while earning no money themselves, a 25 basis point cut in the current interest rate environment does not exactly make money funds a dead option.
“It’s more about how big is the rate differentially,” he said. “A quarter-point to cash investors, looking several years back to when rates were zero and they were used to getting nothing?” he asked.
While investors may get “re-sensitized” to yield, at what…
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