As expected, the Fed announced a 0.25% interest rate cut this week, bringing the Fed rate down to 3.88%.

Markets welcomed the news, with the US stock market setting new all-time highs on Thursday.  However, as interest rate cuts have helped move stocks higher, they’ve also moved money market rates lower.

Source:  Moody’s Analytics – https://www.economy.com/united-states/money-market-rate

Money market rates averaged 4.34% in April when the inflation rate was 2.33%.  That means money market was yielding a full 2% over inflation, or what’s referred to as a 2% “real return”.

Now, we have money market rates at 3.89% in November (before this week’s rate cut) and inflation running at 3.03% based on our most recent data.  This gives us a real return for money market of 0.86% as interest rates have fallen and the inflation rate has risen.  Given the current trajectories, it may become more difficult for savers to find safe havens in 2026 that can keep up with inflation.

This comes at a time when money market deposits are at an all-time high of nearly $7.5 trillion.

Stock and bond investors are hoping the squeeze of real interest rates for CDs and money markets will bring some of these assets off the sidelines and into the markets.  At a minimum, it could make these safe havens a little less attractive for new deposits and encourage investors to at least consider investing in bonds instead.

 

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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