:max_bytes(150000):strip_icc()/GettyImages-2201143738-e43c7f25c7fa4b2480386942fe017135.jpg "Could Savings Rates Go Lower If Rates Drop? This Expert Says ‘Lock Those Yields In.’")
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Key Takeaways
- Money market funds have been the most popular investment of the last couple years with total assets in them reaching a record $7.8 trillion as of early January.
- As inflation becomes less of an issue for the Federal Reserve, yields can move lower, Manulife John Hancock’s Roland said.
Money market funds might offer less bang for your buck this year.
Emily Roland, Manulife John Hancock Investment Management’s co-chief investment strategist, in a Monday interview with CNBC advised investors to “lock those yields in,” with the firm forecasting money market accounts’ returns to decline over the course of the year. “Money market yields probably get chopped down,” she said.
Investors have piled into money market funds over the last couple of years, with inflows into those short-term, low-risk investment vehicles surging. Total assets in such funds hit a record $7.8 trillion as of last week, according to Ycharts. However, money market funds may become a less desirable place for investors to park their cash as their yields track the Federal Reserve’s rate path, which is projected to go lower by the end of 2026.
WHY THIS MATTERS TO YOU
Investors have been driving outsize inflows into money market funds as they presented enticing relative returns. They may seek alternatives if their value proposition falls.
“We think that inflation is not a significant issue for the Fed. It’s really more about the labor market this year,” Roland said. “And if inflation can come down and the bond market starts to sort of shake out of it and pick up on that, we think yields can move lower over the course of the year.”
Recent data showing inflation decreasing and the labor market weakening, plus the upcoming nomination of a new Fed chair by President Donald Trump, who has been vocal about wanting lower interest rates, could mean more cuts, not fewer, according to Bankrate senior industry analyst Ted Rossman.
However, those cuts may land later this year than previously anticipated. There’s a more than 60% probability of the current benchmark rate, 3.5% to 3.75%, staying the same by the April Fed meeting, up from the 39% consensus in the first week of January, according to CME FedWatch.By December, most traders expect a range of 3% to 3.25%.
Rossman sees the highest rate for nationally available savings and money market accounts declining, but possibly outpacing inflation, forecasting high-end annual percentage yields of 3.7%, down about 1 percentage point from the top APY last year.
Still, that would be much higher than the current national average for savings accounts. The FDIC’s national average for savings accounts’ yields is 0.39%.
