Investors have significantly increased their allocations to money market funds (MMFs) in anticipation of a potential interest rate cut by the U.S. Federal Reserve. According to Bank of America (BofA), $37 billion flowed into MMFs in the week leading up to Wednesday, signaling a strong preference for cash-like investments as the Fed’s September decision approaches.
This influx positions MMFs for their largest three-week cumulative inflow since January, with a total of $145 billion invested, as reported by BofA using data from financial information provider EPFR. The move reflects investor caution and a strategic shift towards liquidity in anticipation of changes in monetary policy.
In addition to the surge in MMF investments, BofA’s weekly market flow report revealed that investors allocated $20.4 billion to equities, $15.1 billion to bonds, and $1.1 billion to gold. Despite these allocations, many fund managers are betting that an eventual rate cut will lead to reduced MMF returns, potentially spurring increased investments in stocks and bonds.
Historically, significant rate cuts by the Fed often result in continued inflows into MMFs before funds shift into riskier assets. BofA strategists, led by Jared Woodard, noted that the initial Fed rate cut usually precedes additional cash inflows in a ‘soft landing’ scenario. Conversely, if the economy faces a more severe ‘hard landing,’ bonds are likely to benefit more.
Recent economic indicators suggest a gradual economic slowdown, aligning with the ‘soft landing’ scenario. In line with this, investment-grade bonds have attracted their 43rd consecutive week of inflows, totaling $8.1 billion. Emerging market equities also saw continued investment, with $4.7 billion added in their 12th straight week of inflows, marking the longest streak since February 2024.
As the Fed’s rate decision approaches, the market’s cautious positioning in MMFs and steady flows into bonds and equities reflect a strategic approach by investors navigating potential shifts in the economic landscape.
I am Aparna Sahu
Investment Specialist and Financial Writer
With 2 years of experience in the financial sector, Aparna brings a wealth of knowledge and insight to Investor Welcome. As an accomplished author and investment specialist, Aparna has a passion for demystifying complex financial concepts and empowering investors with actionable strategies. She has been featured in relevant publications, if any, and is dedicated to providing clear, evidence-based analysis that helps clients make informed investment decisions. Aparna Sahu holds a relevant degree or certification and is committed to staying ahead of market trends to deliver the most up-to-date advice.
