Chasing Interest Rates and Avoiding a “Cash Blunder”
By Nick Kendall CFPⓇ
When I hear news about the banking industry and current interest rates, I often have memories from my childhood and the handful of piggy banks in my bedroom. This leads to other memories of opening my first savings account at the age of 15. I wish I had my old savings passbook to be reminded of the interest I was making, and the amount of money I was working with back in the day!
It’s interesting having similar conversations and thoughts today when it comes to interest rates and their impact on our current economy. To review how we got to this point, stimulus money due to the pandemic, along with supply and demand issues, caused sustained inflation. This led to the raising of the federal funds rate by the Federal Reserve beginning in March of 2022. The rate had been historically low since 2010 until the Fed’s monetary policy changed from a 0.25 mark to an initial quarter of a percent jump. The current rate is sitting at a twenty year high of around 5.30%[1]. The inflationary trends have been lower due to less money in circulation which seems to indicate the tightening of the money supply has cooled the economy enough to get inflation under better control. Many have taken advantage of putting their cash in different fixed income vehicles to capture the higher interest rates being offered through high yield savings accounts, money market funds, etc. Earlier this month, the Investment Company Institute reported money market funds assets had hit an all-time high of $6.12 trillion[2]. My wife and I have made similar decisions since early 2023 to capture higher interest rates for our cash in an online high yield savings account.
What does the future look like with interest rates? Federal Reserve chair, Jerome Powell, emphasized inflation has remained stubbornly high in recent months and said the Fed doesn’t plan to cut interest rates until there is “greater confidence” price increases are slowing sustainably to its 2% target. While Mr. Powell stated his hope is for one decrease in the fed rate by the end of 2024[3], we don’t believe it is helpful to focus on timing when these rates will begin decreasing. Instead, given we believe rates will decrease, even if we don’t know when, we want to focus on how to prepare for the decrease when it happens. The current state of where we are presents these realities.
There are opportunities for your cash to capture higher interest rates in different saving instruments.
If you currently have bonds, or bond mutual funds, you are generating more yield than you were prior to 2022. The 10-year Treasury yield on January, 1, 2022 was 1.724, and on June 25, 2024 it was 4.255[4]. Bond prices and bond yields are always at risk of fluctuating in value due to periods of rising or falling interest rates. Since the rates rose in 2022 the inverse relationship of bond rates vs. bond value has caused anything beyond a short-term bond to drop in value, but the yield has increased. What does this mean? You have had more interest, or dividends, dropping into your investments. If you have bond mutual funds, or ETFs in your portfolio (and most of you do), this means you have had more money come into your account which most likely has been re-invested into your fund(s) where your new shares have been bought at a generally lower share price. One day when these funds fully recover, and then grow, you have captured a greater growth impetus. When will these bonds, or bond funds, fully recover? Once the Fed begins lowering the fed fund rate, we expect that you will see this increase in value happen in your bond funds.
What is the next move for your money in these savings instruments when the rates do go down?
1) Continue to evaluate your next six years of income needs, and have this amount in fixed income instruments like bond funds, not in stocks. This should be the practice regardless of where we are with interest rates.
2) Always have 3-6 months of emergency savings for non-discretionary expenses, but once rates begin decreasing, have a plan for where you can capture a higher rate of return for your cash beyond your emergency savings, perhaps by having less in checking and more in savings, CDs, or bond funds. If you are not intentional with a plan, you could find you have larger amounts of cash than you’d like getting a minimal return in a lower interest rate climate, creating a potential “cash blunder”. Why is this a concern? One chief concern we plan to combat over time is inflation and its impact on your portfolio. Consistent lower returns in such investments can lead to an inability to keep up with historical inflationary trends and your ability to meet basic financial needs over time. We describe this as “Going Broke Safely”.
Are you currently capturing the opportunity to make more money with some of your cash in our current interest rate climate? Do you have a plan on when to pivot away from lower future interest rates in savings vehicles, and where to then invest this money? There will be opportunities to capture when the previously mentioned $6.12 trillion in money market accounts begin to look for better opportunities when rates begin declining.
If you want to review your current plan with us to be reassured of how we are taking advantage of these opportunities, and how we are prepared to pivot, please reach out so we can schedule a review. You may also want to discuss money you have sitting in cash and how to get a higher rate of return both now and in the future. We’d love to help present a plan, or reassure you of your plan, for such a circumstance.
Please Note
When it comes to how frequently you should monitor your investments, there are two unhealthy extremes, with ‘never looking’ at one end of the spectrum and ‘obsessively looking’ at the other end. May we suggest using our quarterly commentary as a prompt to review your accounts, helping you avoid both extremes? You can review your current accounts by logging into www.cirstatements.com. If you have never logged into that site, please call our office and we will be happy to help you register.
[1] Michael Adams, Federal Funds Rate History 1990 to 2024, Forbes, May 20, 2024, 1:56pm, https://www.forbes.com/advisor/investing/fed-funds-rate-history/
[2] Joy Wiltermuth, Money-market fund assets jump to $6.12 trillion, Market Watch,Jun 13, 2024 at 3:51 pm ET, https://www.marketwatch.com/livecoverage/stock-market-today-dow-futures-steady-as-nasdaq-eyes-new-record/card/money-market-fund-assets-jump-to-6-12-trillion-0jl5mjCzkYfKUdV6GOMe
[3] Christopher Rugaber, Federal Reserve says interest rates will stay at two-decade high until inflation further cools, Associated Press, Updated 8:53 PM CDT, May 1, 2024, https://apnews.com/article/federal-reserve-inflation-prices-interest-rates-cuts-348e4db8a6c91f108268713d181d6a17
[4] Wall Street Journal, Markets, https://www.wsj.com/market-data/quotes/bond/BX/TMUBMUSD10Y