Fed’s Vow to Cut Rates Shines Light on Cash

Financial advisors help clients milk the yields from cash for as long as possible.

With the Federal Reserve sticking with its promise to eventually cut interest rates at least three times in 2024, the next challenge for financial advisors could be finding alternatives for their clients’ high-yielding cash positions.

But as the Fed continues to pull strings balancing inflation and employment rates against the risk of an economic downturn, a lot of advisors and market watchers are not taking the Fed’s bait on looming rate cuts.

“The market has consistently misjudged the Fed's decision-making process on rate changes,” said Cyrus Amini, chief investment officer at Helium Advisors in Everett, Washington.

Barbell Bond Strategy

With the Fed’s overnight rate hovering at 5.25% after a string of rate hikes during the Covid pandemic, Amini is firmly in the “higher-for-longer” camp, while focused on the reality that the attractive yields on cash accounts won’t last forever.

“At these levels, we're encouraging clients to lock in the higher levels via CDs or structured notes with investment grade issuers,” he said. “Additionally, we are utilizing fixed income managers focused on credit exposure with 5-7 years of duration.”

The barbell approach, Amini said, “allows our clients to benefit from high current rates and maintain income over the next few years.”

Phil Kosmala, managing partner at Taiko, an outsourced CIO for RIAs in Chicago, also isn’t losing much sleep over the Fed’s nod toward lower interest rates.

Higher for Longer and Money Market Yields

“Absent a recession, we believe the market and the Fed are overestimating the quickness and magnitude with which the Fed funds rate is going to decline,” he said. “The massive easing in financial conditions since the October 2023 Powell pivot along with the bipartisan trends of deglobalization, trade wars and trillion-dollar deficits will keep rates higher for longer as the proverbial last mile of inflation proves difficult to attain.”

With money market funds still paying yields above 5%, Kosmala doesn’t see any reason to rush clients out of cash and into other asset classes, including stocks and bonds.

“Even if the Fed were to cut three times this year and three times in 2025, these liquid cash investments will still offer total returns north of 5% this year and 4.5% next year,” he said.

Regardless of how quickly the Fed moves on interest rates, Jake Miller, chief solutions officer at Opto Investments in Los Angeles, believes financial advisors should be preparing for lower yields on cash, which could result in some of that money moving back into the stock and bond markets.

He said the market is already pricing in interest rates to drop by 70 basis points by year end and another 75 basis points next year.

“With inflation pressures persisting and general resilience in consumer and business spending, this amount of easing may be overly optimistic,” Miller said. “Regardless, it is prudent to have plans for how to adjust portfolios in the event that rates fall or rise.”

Floating Rate Debt and High-Yield Savings Accounts

Miller said one potential strategy is a gradual shift into floating rate private credit, particularly in the asset-backed space where collateral can cushion defaults.

“Floating rate debt allows investors to continue to earn higher rates if the Fed stays put but has spreads that can generate real income for a portfolio even if government rates fall,” he added. “And, of course, if the market has gotten ahead of itself, a floating rate offers protection in the event that rates rise from here.”

Meanwhile, Chuck Failla, founder and chief executive of Sovereign Financial Group in New York, plans to let his clients ride the high-yielding cash train for all it’s worth.

“With rates higher than they have been in years, cash has become an interesting asset class again,” he said. “At our shop, we have partnered with StoneCastle as our High Yield Savings solution for clients.”

The idea, he added, is that high yield savings accounts “should always deliver a better yield on cash then a commercial bank checking account, so on a relative basis, they should still look good, regardless of what the prevailing interest rate is on cash.”