Those nice, safe returns on cash sure have been sweet, but don’t count on them lasting. After years of near-zero yields, interest rates began a rewarding upward climb in 2022. In early 2024, prime money market funds yielded an average of 5.1%. You could find one-year certificates of deposit at 5.5% and high-yield savings accounts cresting 5%. Those yields handily beat inflation, which rose 3.4% overall in 2023. Little wonder that investors have added more than half a trillion dollars to money market funds in the past 12 months.
But the Federal Reserve’s expected interest rate cuts in 2024 will sap yields on all kinds of savings accounts and safe, short-term investments. Investors are betting that the Fed will cut interest rates faster and deeper than it has publicly telegraphed, perhaps pushing money fund yields below 4% later this year. Most economists expect inflation will fall also, potentially keeping inflation-adjusted returns on cash in the black. Still, the prospect of more-anemic interest rates is sparking many investment professionals to suggest that investors rethink their plump cash positions.
