Records, as they say, are made to be broken. But some seem so out of reach we don’t pay attention to them until they are nearly upon us. Think baseball legend Cal Ripken’s consecutive games-played streak, US swimmer Katie Ledecky’s gold medals or basketball star LeBron James’ career points. That’s the case with the record amount of money market fund assets under management reached in late November.
That number? US$7,000,000,000,000. Yes, the convention is to abbreviate it to US$7tn, but spelling it out shows just how big that number is, and its cause for celebration. The broader liquidity market (including products denominated in euros and pounds, pooled investments, private funds, and other forms) is also at an all-time high.
In its conference in Pittsburgh last summer, Crane Data also wedded sports and money markets with a version of the Steelers terrible towel that touted how close the industry was to US$7tn in assets. We might soon need a new one to wave.
Of course, the tremendous inflows started when the US Federal Reserve (the Fed) began hiking rates in March 2022 and continued as rates climbed through 3%, 4% and 5%. But this accomplishment is decades in the making. Federated Hermes history dates to 1974 when we launched the first mutual fund to use the term “money market” in its name. From convincing investors of the value of “money market funds” to battling regulators, steering past market upheavals, and navigating a zero-rate environment, we have championed them because we believe in their worth to clients as both a tool for cash management and as a critical part of portfolio allocation.
But with the Fed cutting rates, surely the recent success is coming to an end, right? We don’t think so.
But with the Fed cutting rates, surely the recent success is coming to an end, right? We don’t think so. A hypothetical theme popular in the markets in the coming months might be that clients can hardly wait to transfer their “sideline cash” to the stock and bond markets if yields dip much further. We believe that for most investors, cash is not coal waiting to be shovelled into a furnace to power riskier asset classes. Liquidity vehicles’ utility as a mechanism to pay expenses with the potential for an attractive return and as a crucial part of a balanced portfolio will persist. If the Fed’s terminal federal funds rate settles in the mid 3s (we now think 3.5% to 4% is possible) all segments of the market – government, prime and municipal money funds1 especially – should remain a robust asset class.
Fed and federal
It is still too early to truly assess the ramifications on the liquidity markets of Donald Trump’s return to the White House. We don’t invest based on rumour, speculation or promises. However, we continue to think many of his potential policies, especially on tariffs and immigration, could be inflationary. Those primarily impact the money markets through the Fed, which should be factored into its updated Summary of Economic Projections released after its meeting on 18 December. In fact, that document is probably more important than the Federal Open Market Committee’s decision to lower or maintain the target range – at present a coinflip – as we expect policymakers to adopt an ‘every-other-meeting cut’ approach in 2025. A pause in December likely means a cut in January; a cut likely means a pause. If policymakers slow the pace of easing due to concerns about inflation stalling or trending back up, money markets likely will see yields stabilise at elevated levels.
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