Investment advisers urge clients to ditch cash after Fed rate cut By Reuters

By Suzanne McGee and Carolina Mandl

(Reuters) – Investment advisers are urging clients to shed heavy cash allocations now that the Federal Reserve has begun long-awaited interest rate easing, a process expected to limit the appeal of money market funds in the coming months .

Retail money market funds have drawn inflows of $951 billion since 2022, when the Fed began its rate hike cycle to control inflation, according to the Investment Company Institute, which represents investment funds. Their assets stood at $2.6 trillion on September 18, about 80% higher than at the start of 2022.

“As policy rates decline, the appeal of money market funds will decline,” said Daniel Morris, chief market strategist at BNP Paribas (OTC:) Asset Management.

On Wednesday, the U.S. central bank cut the federal funds rate 50 basis points higher than usual to a range of 4.75 percent to 5 percent, making holding cash in deposit accounts and similar instruments cash to be less attractive.

“You’re going to have to move everything … higher in the amount of risk you accept,” said Jason Britton, founder of Charleston-based Reflection Asset Management, which manages or oversees about $5 billion in assets. “Money market assets will have to become fixed income holdings; fixed income will move into preferred stocks or dividend paying stocks’.

Money market funds—extremely low-risk mutual funds that invest in short-term Treasuries and other cash—are a way to gauge investor interest in the near-risk-free returns they offer. When short-term interest rates rise, money market yields rise with them, making them more attractive to investors.

“Investors need to be aware that if they rely on a certain level of income from that part of their portfolio, they may have to look at something different, or longer term, to lock in rates and not be equally exposed to the Fed lowering interest rates,” said Ross Mayfield, investment strategist at Baird Wealth.

Carol Schleif, chief investment officer of BMO Family Office, expects investors to keep some cash on the sidelines to wait for opportunities to buy stocks.

It could take a week or more for initial reactions to Wednesday’s Fed decision to show up in money market fund flows and other data, analysts note. While the Investment Company Institute reported an overall decline in money market holdings in its latest weekly report on Thursday, retail positions were little changed and advisers said it was hard to get that group to shed their holdings of cash.

Christian Salomone, chief investment officer of Ballast Rock Private Wealth, said clients facing lower returns on cash are keen to invest elsewhere.

Still, “investors are stuck between a rock and a hard place,” Britton said, faced with a choice between investing in riskier assets or earning a lower return on cash-like products.