How might rate cuts affect cash?
Would more than one rate cut undermine cash as an attractive asset class? Probably not. Debbie Cunningham explains.
Published June 20 2019
I'm Debbie Cunningham, Chief Investment Officer and Executive Vice President of Federated's Liquidity Portfolios.
Would more than one rate cut undermine cash as an attractive asset class?
I think that's unlikely at this point. We existed in a zero-rate environment for a long time. It was not the best environment for asset gathering in the cash space, but we don't think we're going back to that environment. That was a situation that required very different policy reactions because of the global nature of the financial crisis that was occurring. We're certainly nowhere near that type of an environment. Now we may see one cut, we may see two cuts, but what you're effectively ending up with, then, in that case, are liquidity products that are still in the high ones, low two percent types of returns which effectively should still allow investors to be comfortable that they're beating inflation and earning a return that's commensurate with the risk. Certainly, when you look at what happens in an economic slowdown, there might be some credit considerations in the marketplace. And in that type of an environment, a liquidity product or a cash or a money market product would be the type of vehicle where you would see asset gathering occur just to reduce the risk within the portfolio. So we think that one or two rate cuts are something that would be sustainable in a positive market momentum for the liquidity markets.
Disclosure Views are as on June 5, 2019 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Federated Investment Management Company 19-10092 (6/19)