The stock market might be desperate for rate cuts, but for those with cash to stash away, high rates are just fine.
High short-term interest rates — closely tied to the short-term rates the Fed uses to implement monetary policy — have greatly increased the incentives for keeping cash on hand over the last couple years.
In early January 2022, you basically received no interest if you put your money in safe money market mutual funds. Now you get more than 5%.
You don’t have to be an economic theorist to see why that’s resulted in money rushing into money market mutual funds. Those dollars chasing higher yields have added to money market fund coffers that were already swollen after the Covid-related stock market sell-off and the string of bank runs set off by the collapse of Silicon Valley Bank in 2023.
According to the latest figures from the Investment Company Institute — a trade and lobbying group for mutual funds — some $6.11 trillion now sits in these funds, up from roughly $4.50 trillion in early 2022.
To be clear, the parallel sagas of the stock investors and money market savers, are two sides of the same coin.
Part of the reason that rate cuts are thought to boost stocks is because those cuts lower the incentives for socking money away in vehicles like super-safe money market mutual funds that invest in things like short-term US government Treasury bills.
Such securities are the closest thing you can get to a risk-free investment. Cutting rates lowers the return on no-risk bets and forces some cash back into the much riskier stock market — or at least that’s the theory.
