Where to Put Your Cash if the Fed Lowers Interest Rates
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What is the main topic discussed in this episode?
Here's your Money Briefing from Monday, December 11th. I'm J.R. Whelan for The Wall Street Journal. The Federal Reserve raising interest rates made 2023 a good year to have extra cash to invest, with many banks and money market funds offering rates not seen in years. But what should you do with your cash now that the Fed has signaled it could be done raising rates?
Most of the advisors I spoke to said that regardless of whether or not you feel like we're headed towards a recession or if the Fed can successfully pull off the soft landing that we've been hearing about, that you probably have too much cash.
We'll talk to Wall Street Journal personal finance reporter Amani Moiz after the break.
Where did savers park cash in 2023 to benefit from higher Fed-driven yields?
Signals from the Federal Reserve that it may be done raising interest rates have caused some people to consider changing their investment game plan for their cash. Wall Street Journal personal finance reporter Amani Moise joins me. So, Amani, where did people invest cash this year to take advantage of higher interest rates?
A lot of cash went into money market funds or even brokerage accounts just held as cash balances and brokerage accounts because so many different accounts or products were offering these really high yields that were pushed higher by their Federal Reserve's interest rates.
So why have some people opted not to invest in stocks? We've seen several rallies that could have also allowed people to grow their money.
There's definitely a difference in risk profile. So if you can get a guaranteed 5%, which a lot of these accounts or funds are offering, a lot of people felt it wasn't necessary to take on extra risk.
The benefit there is that your cash is not going to go down in value like a stock might.
Right. Unless you're considering inflation, which complicates things a bit. But either way, those funds are a guaranteed return compared to a stock market, which is more of a bet.
So for people who have invested cash, what are financial advisors saying that people should have on their radar heading into the new year that could impact their investment?
Most of the advisors I spoke to said that regardless of whether or not you feel like we're headed towards a recession or if the Fed can successfully pull off the soft landing that we've been hearing about, that you probably have too much cash. Cash balances went up across the board over the last few years just because a lot of people were being more cautious because of all the geopolitical uncertainty around
Why did many investors choose cash or money-market funds instead of stocks this year?
inflation. But the message that I'm hearing from advisors is now's the time to take more risk, because as you said earlier, yes, you can get a guaranteed return. But if you put it in the stock market, you would have gotten a lot more.
And the feds chatter about interest rates. What's the connection here?
The Fed has signaled that it's likely done raising interest rates for now, barring kind of any big surprises in the economic data. And that's because we've seen inflation start to cool. Prices aren't rising as fast. Wages aren't rising as quickly, which is giving the Fed the confidence to say, you know what, OK, maybe we don't have to increase interest rates anymore in order to reach their inflation target.
Does that mean that the next step here is for the Fed to lower rates?
What are advisers recommending now that the Fed may be done raising rates?
Yes, eventually. But what we're in right now is called a pause period because no one really knows when the Fed will start to lower rates. And they've said that they're not even close to discussing lowering rates. But that puts investors in a really interesting situation because conventional wisdom will say that the stock market will go up during a cutting cycle and it'll have a little bit of a harder time during a hiking cycle. But there's no real conventional wisdom for what to do in a pause.
If the Fed does go through a period of holding rates steady before they might potentially lower them, what does that mean for people trying to decide what to do with their cash?
There's conventional wisdom that applies for what to do during a hiking cycle and what to do during a cutting cycle.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:02–0:59
2
Where did savers park cash in 2023 to benefit from higher Fed-driven yields?
0:59–2:34
3
Why did many investors choose cash or money-market funds instead of stocks this year?
2:34–3:14
4
What are advisers recommending now that the Fed may be done raising rates?
3:14–4:44
5
How could a Fed 'pause' influence returns for cash, bonds, and stocks?
4:44–6:03
6
Which investments do advisers suggest if you reduce cash holdings going into the new year?
6:03–6:30
Speakers
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