Where to put your cash to work before the Fed cuts rates again

With the Federal Reserve poised to cut interest rates, signaling an end to peak cash yields and prompting a re-evaluation of the record $7.4 trillion held in money market funds, investors are advised to strategically reallocate capital. Experts recommend laddering Certificates of Deposit for risk-averse investors, while income-focused portfolios should consider short-duration, high-quality bond ETFs or diversified bond ladders. For those with higher risk tolerance, maintaining cash in money market funds within investment accounts for dollar-cost averaging into equities, potentially favoring broader or equal-weighted indices, is suggested as yields decline.

Analysis

The Federal Reserve is anticipated to cut the federal funds rate by 25 basis points to a range of 3.75%-4.00% at its upcoming meeting, with a 97% market probability according to the CME FedWatch tool, and another cut expected in December. This monetary easing signals a decline in cash yields, prompting a re-evaluation of the record $7.4 trillion currently held in money market funds, which have seen their annualized seven-day yield drop to 3.92% from previous highs of 5%.

Financial strategists, like Philip Blancato of Osaic, emphasize the diminishing opportunity of cash instruments to beat inflation, advocating for a strategic reallocation. While maintaining liquidity for emergencies is crucial, with Chelsea Ransom-Cooper of Zenith Wealth Partners suggesting six months of expenses in high-yield savings, excess capital should be deployed into higher-yielding alternatives. BTIG data indicates that CD rates have remained relatively solid, with only half of online banks cutting rates since September, suggesting some front-running of Fed actions.

For risk-averse investors, laddering Certificates of Deposit (3 to 14 months) offers maximized yield and liquidity management. Income-focused investors are advised to consider short-duration, high-quality bond ETFs or diversified bond ladders spanning 1-5 years, incorporating Treasurys, corporate bonds, and credit funds. For those with higher risk tolerance, leveraging money market funds within investment accounts for dollar-cost averaging into equities during market downturns is recommended, with a suggested shift away from concentrated "Magnificent 7" exposure towards broader indices like FNDX or equal-weighted S&P 500 funds.

Key Decisions for Investors

• Investors should actively re-evaluate and potentially reallocate excess cash holdings beyond emergency reserves, given anticipated Fed rate cuts and declining money market fund yields.
• Consider diversifying fixed-income exposure through short-duration, high-quality bond ETFs, diversified bond ladders (1-5 years), or laddered Certificates of Deposit (3-14 months) to optimize yield and manage interest rate risk.
• For higher risk tolerance, strategically deploy capital into equities by utilizing cash in money market funds within investment accounts for dollar-cost averaging during market downturns, favoring broader or equal-weighted indices over concentrated "Magnificent 7" exposure.