With $6.5 trillion tucked away in cash, how should investors navigate the Federal Reserve’s shifting stance on interest rates?
Investors have stashed a record $6.48 trillion in U.S. money-market funds as of January’s end.
Federal Reserve Chairman Jerome Powell signals no imminent rate cuts, advocating patience on inflation.
Bond markets react with caution, while U.S. stocks continue to hit record highs.
The upcoming consumer-price index (CPI) release is highly anticipated as a key economic indicator.
Investors are holding their breath and their cash, as expectations of interest rate cuts by the Federal Reserve have been recently dampened. A record-setting $6.5 trillion has been parked in U.S. money-market funds, with the pile growing as the initial excitement over a potential shift in Fed policy subsides.
This hefty sum represents a conservative move by investors who have interpreted remarks from Federal Reserve Chairman Jerome Powell with trepidation. Powell dismissed the likelihood of a rate cut in March during a policy meeting and reiterated this stance in a televised interview, emphasizing a cautious approach to rate changes until inflation is convincingly under control.
Despite the initial optimism that led to positive returns for U.S. bond funds earlier this year, bond indexes slipped back into negative territory as February unfolded. The bond market’s sensitivity to Powell’s guarded language has been palpable, with the 10-year Treasury yield reaching its highest point since mid-December.
Looking ahead, all eyes are on the release of the CPI data for January, which follows a strong jobs report and a 3.3% GDP growth in the fourth quarter. Although inflation has decelerated from over 9% to a 3.3% annual rate, it remains above the Federal Reserve’s 2% target.
In contrast to bonds, U.S. stocks have seemingly shrugged off the cautious tones, with indices like the S&P 500 reaching new heights, a milestone not seen since 1972.
With the current “reality check” regarding rate-cut expectations, George Catrambone of DWS Group endorses investing in shorter-duration Treasuries, particularly attractive given their rates have hovered above 5% for nearly a year. Meanwhile, Adam Hetts from Janus Henderson Investors warns against being overly conservative with cash holdings, as it could be detrimental to long-term financial goals.
Investors are advised to maintain a balanced approach, with a traditional 60:40 allocation to stocks and bonds, especially considering the attractive
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