Money Market Rates Are Lower, Yes. But Compared to What?

When money market interest rates broke above 5 percent last year, it was a wake-up call for many investors who had grown accustomed to getting almost nothing for their money at banks.

Hundreds of billions of dollars flowed into the funds, which swelled in size month after month. Now that the Federal Reserve has begun cutting short-term interest rates — and money market funds have begun reducing their rates, too — you may expect that these funds would be less appealing.

But nothing could be further from the truth. The “wall of cash” in money market funds isn’t flowing into the stock market or other risky investments. It is, for the most part, staying where it is — and growing larger.

In fact, cash in money market funds has hit new peaks since Sept. 18, when the Fed reduced its benchmark federal funds rate by half a percentage point to a range of 4.75 to 5 percent. Meanwhile, rates for the biggest money funds tracked by Crane Data, an independent financial market research firm, have dropped to 4.68 percent from 5.06 percent. But $159.2 billion flowed into money funds overall through Oct. 17 — putting their total assets at $6.794 trillion.

That’s good news, as I see it. It means that the vast majority of investors are keeping their cash in safe, high-paying locations — getting far better yields than most bank accounts offer, and avoiding excessive risk-taking with money that they presumably can’t afford to lose in speculative bets. What’s more, if rates fall further, money market funds are likely to retain a comparative advantage for months to come, pulling in cash because they continue to look better than the alternatives.

Why Use Them

The funds are popular because they are a fine spot for parking short-term cash. Your money is available whenever you want it, no strings attached. And the best low-cost money market funds are still providing a decent real return: more than 2 percent, after inflation.