The Fed’s Rate Cuts Will Spark a $2 Trillion Exodus from Money Market Funds
Money Market Funds to See Massive Outflows
According to the article, the Federal Reserve’s easing cycle is set to fuel a huge move out of money-market funds, Apollo Global Management, Inc.’s Torsten Slok said.
The firm’s chief economist said the Fed’s interest-rate hikes pumped $2 trillion into money-market accounts from March 2022 to September 2024. Assets held in money-market funds hit an all-time high of $7 trillion this month.
Where Will the $2 Trillion Go?
Now that the central bank has started cutting rates, that money will most likely rotate out of those accounts and into higher-yielding assets, Slok said.
He added, however, that the rotation would not necessarily benefit stocks but would instead result in inflows into the credit markets.
“Where will the $2 trillion added to money market accounts go now that the Fed is cutting? The most likely scenario is that money will leave money market accounts and flow into higher-yielding assets such as credit, including investment grade private credit,” Slok recently wrote.
In an earlier writing, Slok said credit markets appeared well-positioned for further inflows after the election.
“We expect credit fundamentals to remain robust. This, combined with elevated all-in yields and steep yield curves, should continue to attract inflows into credit, which should support valuations even though room for further compression is getting more limited,” Slok wrote earlier this month.
Slok’s prediction could disappoint stock bulls who were hoping the rotation out of money-market funds would fuel a fresh rally for equities.
Goldman Sachs analysts, meanwhile, said recently that investors should still favor stocks over bonds, as Fed easing and a strong economy support a pro-risk, late-cycle environment.
The analysts said in a note last month that “during late-cycle backdrops, equities can deliver attractive returns driven by earnings growth and valuation expansion, while credit total returns are usually constrained by tight credit spreads and rising yields.”
Discussion Questions
1. What is the Federal Reserve Board?
The Federal Reserve System is the central bank of the United States.
The Federal Reserve Board, currently chaired by Jerome Powell, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States.
2. Visit the following “About the Fed” section of the Federal Reserve Board’s internet site:
https://www.federalreserve.gov/aboutthefed.htm
What are the five general functions of the Federal Reserve System?
The Federal Reserve System performs the following five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest:
(a) It conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
(b) It promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
(c) It promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
(d) It fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and
(e) It promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.
3. The Federal Reserve Board is an independent government agency. Although its governors are appointed by the U.S. president and must be confirmed by Congress, its monetary policy and related decisions are made autonomously and are not subject to approval by the federal government. In your reasoned opinion, should the Federal Reserve Board’s policies and practices be subject to approval by one or more branches of the federal government? Why or why not?
This is an opinion question, so student responses may vary. In your author’s opinion, the Federal Reserve should remain an independent government agency. Its independent status makes the Federal Reserve immune from the political pressures that otherwise might be imposed upon it by one or more branches of the federal government. The Fed’s independent status permits it to focus on the long-term health of the U.S. economy, rather than on short-term political objectives.
For more information regarding the independence of the Federal Reserve, please see the following website:
https://www.investopedia.com/articles/investing/041515/why-federal-reserve-independent.asp
