Daniel T. from Tigard, OR asks: Hi Mitch, I was under the impression that as the Fed lowered interest rates, money would shift out of money market funds. The hope was that the money would flow into stocks, lifting prices in the process. The stock market is doing great, but I’ve noticed that even more money has flowed into money market funds. Can you square this circle for me? Thanks!
Mitch’s Response:
Thank you for sending in your question, Daniel. You bring up an interesting point—as the Fed cuts rates and as the stock market continues to rally, one might have expected logically that money would “come off the sidelines” and flow into risk assets. But we’re not seeing that in money market funds.
As seen on the chart below, cash continues to pour into money market funds at a steady clip:
Money Market Funds, Level
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I think there are a couple of reasons cash keeps moving into money market funds. The first is that money market funds continue to pay a competitive yield relative to other cash alternatives, like high-yield savings accounts. Money market funds buy Treasury bills and other short-dated instruments, and currently pay north of 4.5%. With recent Fed rate cuts, many banks have been quick to reflect those changes in high-yield savings accounts, which pay closer to 4% or even lower. Investors are behaving accordingly.
The second reason we’re not seeing a massive rotation from money market funds into equity markets is that cash does not generally compete with stocks and other risk assets. Cash mostly competes with cash, in my view, which is why money market funds continue to see inflows. Money market funds continue to be where investors can find some of the most attractive, lowest-risk yields.
Consider that money market funds also do not represent the only cash being held by households and businesses. Investable cash exists in other places, so it’s possible for the stock market to continue rising alongside the level of assets in money market funds. It’s not a zero-sum game.
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