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Investors flock to cash ahead of Fed meeting

Investors are going to the mattresses, stuffing their money away until they get better clarity on the Fed's intentions for interest rates.

Of course, the move hasn't been to actual mattresses but an intensifying push to money market funds, which have taken in $48 billion over the past four weeks and $212 billion in the second half of 2015, according to Bank of America Merrill Lynch. The $13.4 billion inflow over the past week marks the 10th-straight positive week, the longest streak since March 2008 for the $2.7 trillion money market industry.

The trend comes ahead of next week's two-day Federal Open Market Committee meeting, which likely will see the U.S. central bank approve the first increase in its key interest rate since late 2006. The Fed has kept the funds rate near zero since late-2008 after lowering it to help spur economic growth amid the Great Recession.

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While traders Friday assigned an 81 percent chance that a hike will be announced Wednesday, there's uncertainty over where rates go from there. Most on Wall Street expect the Fed to move slowly, but uneven rhetoric through the year from policymakers has inspired repeated bouts and angst that have led to volatility in the financial markets.

Money under mattress
Dave Nagel | Getty Images

"What's most important about that meeting is not what the Fed does, but what they say," Brian Rehling, co-head of global fixed income strategy at Wells Fargo, told media members at a recent briefing. Rehling added that he expects the Fed to raise rates next week and then twice more in 2016 — likely in mid-summer and again in December, after the presidential election.

Inspiring at least some of the worry among market participants is that the Fed will be tightening policy as its global counterparts are loosening, mimicking the FOMC's strategy over recent years of cutting rates and printing money to buy financial assets.

"The key theme over the next year ... is really going to be divergence," Rehling said. "This is the first time in some time we've seen such a pointed divergence."

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Investors have been indiscriminate in the move to cash, pulling money out of both bond and equity funds as the big Fed date approaches.

Equity funds saw $6.4 billion in outflows over the past week while market participants pulled $6.1 billion from fixed income, according to BofAML. Yield plays suffered in particular, with high-yield funds losing $3.8 billion — the most in 15 weeks, while bank loans and master limited partnerships also sustained losses.

The trend comes amid a rocky time for stocks.

The S&P 500 has slipped 3.5 percent in December and is now negative year to date, with a 1.5 percent decline heading into the final weeks of trading. Small-cap stocks have taken it especially hard, with the Russell 2000 declining 5.1 percent this month and 5.6 percent for 2015. In sector terms, rate-sensitive financials have been the second-worst on the S&P 500, diving 4.6 percent this week despite seeing $1.1 billion in inflows, primarily to the SPDR Financial Select Sector exchange-traded fund.

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"Everybody's betting on the Fed's language, not whether they're going to increase or not increase," said Michael Yoshikami, founder and CEO of Destination Wealth Management. "Certainly if you're a trader you don't want to be exposed based on what adjectives (Fed Chair) Janet Yellen is going to use."

Yoshikami expects the Fed to telegraph a highly dovish message — essentially that the rate increase does not signify a substantial difference in the accommodative policy in place since the financial crisis but rather a small first step towards normalization.

"People are unsure of what's going to happen," he said. "If they do come out and they're very dovish, the market is going to react fairly positively."