The Wall Street Journal writes that, "The Era of No-Brainer 5% Returns on Cash Is Ending. The article explains, "It's getting more complicated to hold cash. Certificates of deposit, money-market funds and various other cashlike investments have offered healthy returns, in many cases over 5%, since the Federal Reserve started lifting interest rates two years ago. But with the central bank now considering cutting rates, some cashlike investments are staying strong while others have begun to decline in yield." (Note: We look forward to seeing those of you attending our Bond Fund Symposium next week in Philadelphia! Registrations are still being taken for the show, which is March 25-26. Attendees and Crane Data subscribers may access the conference binder, Powerpoints and recordings (after the show) via our "Bond Fund Symposium 2024 Download Center.")
It tells us, "CDs show the shift under way. Last year, it was easy to lock in a 5% rate for 12 months or longer. Now, the top rates are shorter-term offers. Three-month CDs pay as much as 5.5% annually. CDs that stretch out two years, however, offer under 5%, down from about 5.5% late last year, according to Bankrate data that tracks the highest rates financial institutions are offering. About 70% of high-rate CDs opened in February lasted less than a year, said Adam Stockton, managing director at the data and consulting firm Curinos."
The Journal states, "Americans have been focusing more closely on where they stow their cash since the Fed hiked its interest rates starting in early 2022. At the time, stocks and bonds fell sharply. Cash products started offering loftier interest after years of paying next to nothing. When regional banks failed last year, more money poured into money-market funds, which now have a record $6.5 trillion in assets. The average rate on these funds peaked at 5.2% in December and is now 5.14%, according to Crane Data."
The piece then says, "It is unclear when the Fed will cut rates or how many cuts will happen this year. Though central bankers have penciled in three, they could revise those plans if inflation remains high. Inflation in February was slightly stronger than expected. For the moment, returns on cash remain high. Sixty percent of all CDs that consumers purchased in February were yielding above 5%, and nearly all stood above 4.5%, according to Curinos."
It adds, "When the Fed does cut rates, high-yield savings rates could fall first since they change monthly, followed by Treasury bills and CDs that are bought over periods of time, according to financial advisers. As a result, investors have a new set of considerations. For example, if interest rates fall this year, someone who buys a one-year CD today at 5% or above might end up gaining more in interest than someone who locks in a higher rate for only six months, Stockton said."
In other news, the Fed's release, "Federal Reserve issues FOMC statement," explains, "Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks."
It comments, "In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective."
Finally, the FOMC writes, "In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
