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History suggests that yields on cash will decay after the last Federal Reserve Hike

February 27, 2024

I am going to reveal some interesting facts for the next few weeks that have a bearing on your investments going forward. Thanks to the Capital Group, these facts will help us manage our expectations.

 

#1 History suggests that yields on cash will decay after the last Federal Reserve Hike.

 

This past year the Federal Reserve ended the historic rate hiking cycle.  Cash yields, as represented by the U.S. 3-month Treasury Bill yield, have risen to their highest level in 22 years. Elevated cash rates are meant to slow economic growth. As a result those cash rates haven’t remained elevated for long.

Over the last four rate hike cycles, U.S. 3-month T-Bill rates were an average of 2.5% lower 18 months after the last Fed hike. Similarly, markets are currently pricing in five .25% interest rate cuts in 2024.

The end of interest rate hikes has presented a strong opportunity for investors to redeploy cash. Because change happens quickly, investors attempting to time the market could be left behind.

Even in early months following the Fed’s final hike, equities and fixed income outpaced cash like investments. The advantage has persisted over time. 

Stocks and bonds and a blended hypothetical 60/40 portfolio have sharply outpaced U.S. 3 month T-Bills returns in the first year after the last Fed hike. That return was 14.2% in the first year verses the 4.7% for T-bill. Even 5 years later the 60/40 split average 8.4% per year.

 

My point is that you have to move before all the information confirms the move. Once the Fed is done raising rates, it is time to get into the markets and not look back. We perceive that the Fed is not only done with rate increases but we expect the Fed to lower rates at least a few times before the end of the year. That is like pouring fuel on the fire of the market move.

If you have cash on the side lines, it is time to position that money in stocks and possibly bonds if you want to stay conservative. The markets reward the nimble who know history!


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