The amount of cash held by investors in money market accounts reached a record level in August, even as looming interest rate cuts would lower their returns.
Money market account assets hit $6.24 trillion this month, according to data from the Investment Company Institute as of Aug. 21, despite markets becoming increasingly confident that the Federal Reserve will cut interest rates at its Sept. 17-18 policy meeting.
When the central bank reduces the benchmark federal funds rate, financial institutions are expected to lower the yields on money market accounts that have been above 5% in response to the shift in monetary policy.
Despite those expectations, individual and institutional investors alike have continued to put cash into money market accounts rather than investing in stocks and bonds. About $100 billion in assets flowed into money market accounts in August, according to data analysis firm EPFR.
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The firm's data showed that the latest inflows included institutional investors, while data from the Federal Reserve Bank of St. Louis found that individual investors have more than $4 trillion of funds in money markets.
Investors' dedication to cash could be tested if a weakening economy spurs the Fed into cutting rates sooner or more deeply than expected.
Futures tied to the Fed's main policy rate show markets pricing in about two percentage points in rate cuts over the next year, though the central bank is expected to start gradually with a 25 basis point reduction next month.
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If the economy shows signs of slowing more than anticipated, or conditions in the labor market deteriorate, it could spur the Fed to move forward with bigger rate cuts. Such a scenario could raise the appeal of financial safe havens like money markets despite the falling yields.
Conversely, if the stock market avoids a sell-off over concerns about the economy's health, the higher returns from stocks and bonds could prompt investors to move cash out of money markets.
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Brian Nick, head of portfolio strategy at NewEdge Wealth, said in a report by Reuters that he hopes to persuade clients to diversify their portfolios if yields fall as expected in coming months.
"You have to convince them there's a reason to move away from money markets but also a reason why some other asset offers a better opportunity," he said. "That will be the approach that eventually wins out."
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Reuters contributed to this report.
