Growing It Out
Think of the economy as sitting in the barber chair, waiting for a trim. For most of the past year, everyone assumed the cuts were coming. The only questions were when, how many, and how fast. Lately the barber keeps setting the scissors down. One by one, the rate cuts that markets penciled in have been crossed off the calendar, and rates are growing out instead.
This week the Federal Reserve held its benchmark rate steady at 3.50 to 3.75 percent, the fourth meeting in a row with no change. The bigger news was in the projections. Three months ago the typical policymaker still expected to cut rates this year. In the forecasts released alongside this meeting, the balance flipped, with about half the committee now penciling in a rate increase before the end of 2026, and several expecting two. The cuts did not just stall. They turned into the prospect of a hike.
The chart shows the turnaround. In March, the middle of the committee still saw a rate cut coming this year. In the projections released this week, that same group leans the other way, toward a hike. In three months the Fed did not trim its plans. It reversed them. Stubborn inflation, pushed along by higher energy prices, did the work.
The bond market agreed. After the announcement, the two year Treasury yield jumped to its highest level in more than a year and stocks slipped, both the market’s way of saying it expects rates to sit here or move higher well before they fall. We do not need to know exactly where they go next to act on what is true today, which is that short term cash is being paid more than it has been in years.
This was Kevin Warsh’s first meeting as Fed chair, and he set the tone quickly. He kept the official statement short, stepped back from offering guidance about future moves, and put the emphasis squarely on bringing inflation down, even declining to submit his own rate projection. The message was less about forecasting the path and more about the commitment to price stability. For savers, the takeaway is simple. Plan around the rate in front of you, not a prediction.
When rates were widely expected to fall, holding cash felt like a waiting game. That has flipped. For borrowers, higher for longer is a headwind. For savers, it is a benefit that keeps showing up. Short term, high quality options are paying meaningfully more than cash that sits idle in a low interest checking or savings account.
Plenty of cash is still waiting. Money market fund assets recently reached a record 7.89 trillion dollars. Some of that is exactly where it should be. Some of it is sitting idle by default.
That is the distinction worth drawing. Cash has different jobs. Your emergency reserve, the proceeds from a home or business sale, the money set aside for a purchase next year, the funds you have been meaning to put to work but never quite did. Cash with a near term purpose should stay liquid and accessible. Cash with no assigned job is the cash worth a second look, because short term fixed income, such as money market funds, bank CDs, and Treasury bills and bonds, can earn close to the prevailing rate while you decide. Each one works a little differently in terms of access, insurance, and how the income is taxed, which is part of the conversation.
There is a timing wrinkle worth knowing too. The yield on overnight cash is the first thing to fall whenever the cuts finally arrive. Money in something that resets every day will catch tomorrow’s lower rate just as fast as it caught today’s higher one. For cash you will not need right away, locking in a known rate for six months, a year, or longer can be worth considering, so the income does not vanish the moment the Fed moves. That is a tradeoff to weigh together rather than a one size fits all answer.
The only haircut worth avoiding is the one idle cash takes every month it sits still.
A lot of people hold extra cash because it feels safe, and because they are waiting for things to feel clearer. That instinct is reasonable. The good news is you no longer have to choose between staying safe and earning something while you wait. You do not need a perfect forecast to make a sensible move. You only need to stop leaving money idle by default.
None of this is a call to pile into the market or to chase a number. Yields change, and what fits your situation depends on your plan, not on a headline. It comes down to making sure every dollar is positioned for the job your plan gives it. That is the conversation worth having.
651-982-1115 · legacycapitalwealth.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This material is not individualized investment advice. Please consult us about your specific situation.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Treasury bills are guaranteed as to the timely payment of principal and interest by the U.S. government and, if held to maturity, offer a fixed rate of return and a fixed principal value. The value of fixed income securities will fluctuate and may be worth more or less than the original cost if sold prior to maturity.
Money market funds are not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of an investment at 1.00 dollar per share, it is possible to lose money by investing in them.
Certificates of deposit are FDIC insured up to applicable limits and offer a fixed rate of return if held to maturity. Early withdrawal may result in a penalty and the loss of interest.
Corporate bonds are subject to the credit risk of the issuer and, like all bonds, to interest rate risk if sold before maturity.
Municipal bond income may be subject to the alternative minimum tax. Municipal interest may be subject to state and local taxes depending on your state of residence, and tax exempt status applies to federal taxes unless otherwise noted.
This material is for general information only and is not intended as tax or legal advice. Please consult your tax professional regarding your specific situation.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. Legacy Capital Wealth Management and LPL Financial are separate entities.