Fed Meeting: Monetary Policy Upends Cash Management

Rate cut sets the stage for cash moving to stocks and high-yield bonds from money markets.

As the Fed meets today to discuss what may be the first interest rate cut in more than four years, investors and financial advisors who haven’t already done so will be encouraged to take a closer look at any allocations to cash or cash equivalents.

While the savviest among us might have already adapted in stride with the much-anticipated Fed monetary policy adjustment, and some can easily make the case for remaining in cash even as yields start to drop, there are still ways and reasons to reevaluate the impact of lower interest rates.

Looking at the nearly $2.6 trillion sitting in money market funds capturing yields in the 5% range it is logical to assume some of the money might be heading toward stocks or higher-yielding bonds once the Fed starts trimming those short-term rates.  

Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, said it’s still not too late to make shrewd moves as rates drop.

His three-pronged strategy involves harvesting long-term fixed-income losses that resulted from the recent rising-rate cycle, moving up the Treasury and duration curve for “incrementally higher yields,” and position portfolios for lower interest rates.

“Gold has a negative correlation to real rates, producing an average monthly return of 1% when the Fed funds rate was lowered and an average 1.6% return when real rates fell at the same time,” Bartolini said.

Fed Policy Deflates Cash Balloon

Alex Austin, wealth manager at Savvy Advisors in Bloomfield Hills, Mich., is actively “evaluating how rate cuts will impact portfolios and financial plans.”

“While the size of the cut has yet to be determined, lower interest rates on high-yield savings accounts and money-market funds will certainly follow over the next several days and weeks,” he said. “For those with excess cash and don't have an immediate need for it, look to lock in today’s higher yields by buying CDs or Treasury bonds, sooner than later.”

Of course, not everyone sees the start of a Fed loosening cycle as a reason to alter cash management strategies.

“We don't advise changing cash strategies based on rate changes from the Fed,” said David Shotwell, president of Shotwell Rutter Baer Financial Planners in Lansing, Mich.

“Clients’ money market and CD portfolios are based on how much money they need safe and liquid for short-term and near-term spending,” he added. “Over the long haul the return on both will most likely be about the same as inflation.”

According to Bankrate.com, yields on various forms of cash accounts are still relatively attractive even in the days leading up to a widely anticipated interest rate cut.

Bankrate shows some high-yield savings accounts still offering yields above 5%, but those are expected to drop when the Fed cuts rates.

The best yielding Certificates of Deposit are paying about 4.6% for one-year and those yields go up for shorter terms because the yield curve remains inverted.

“If a client's situation warrants moving to CDs and they don't need access to the money, it can be a good option,” said Gerika Espinosa, a financial planner at Deseret Mutual Benefit Administrators in Salt Lake City, Utah.

“It seems a lot of the flight to CD's is to secure what the known is instead of dealing with the unknown,” she added.