Money market funds have attracted massive inflows over the past couple of years, with total assets reaching a record $7.8 trillion as of early January, according to Ycharts data. These short-term, low-risk investment vehicles have been popular among investors seeking relative returns.
Emily Roland, co-chief investment strategist at Manulife John Hancock Investment Management, said in a Monday interview with CNBC that money market yields "probably get chopped down." She advised investors to "lock those yields in," as the firm forecasts returns from money market accounts will decline over the course of the year.
Roland stated, "We think that inflation is not a significant issue for the Fed. It's really more about the labor market this year." She added, "And if inflation can come down and the bond market starts to sort of shake out of it and pick up on that, we think yields can move lower over the course of the year."
As inflation becomes less of an issue for the Federal Reserve, yields can move lower, Roland said. Money market funds may become a less desirable place for investors to park their cash as their yields track the Federal Reserve's rate path, which is projected to go lower by the end of 2026.
Recent data showing inflation decreasing and the labor market weakening, plus the upcoming nomination of a new Fed chair by President Donald Trump, who has been vocal about wanting lower interest rates, could mean more cuts, not fewer, according to Bankrate senior industry analyst Ted Rossman.
However, those cuts may land later this year than previously anticipated. There's a more than 60% probability of the current benchmark rate, 3.5% to 3.75%, staying the same by the April Fed meeting, up from the 39% consensus in the first week of January, according to CME FedWatch. By December, most traders expect a range of 3% to 3.25%.
Rossman sees the highest rate for nationally available savings and money market accounts declining, but possibly outpacing inflation, forecasting high-end annual percentage yields of 3.7%, down about 1 percentage point from the top APY last year. Still, that would be much higher than the current national average for savings accounts, which the FDIC reports as 0.39%.
Investors have been driving outsize inflows into money market funds as they presented enticing relative returns. They may seek alternatives if their value proposition falls.