(Reuters) – Wall Street executives at the Reuters Next conference in New York expect a $7 trillion cash pile that proved invulnerable to falling interest rates in 2024 to start melting next year as easier monetary policy pushes customers out of ultra-conservative asset class will seduce .
So far this hope has been in vain. Cash in the money markets rose by about $824 billion this year, according to Crane Data, undermining expectations that it would find a home in stocks or bonds as the Federal Reserve began cutting interest rates.
Proponents of the asset class have said they are happy with returns of around 4% – far above the near-zero returns that cash delivered just a few years ago – with relatively little risk. But staying on the sidelines comes at a price: The S&P 500 is up about 27% this year, gold is up about 30% and the Russell 2000 Index of small-cap companies is up more than 17%.
According to Crane Data, cash in the money markets stood at $7.124 trillion as of December 5.
Some on Wall Street believe some of it could be rebalanced in 2025, as rate cuts shrink money market yields and increase the opportunity cost of staying away from stocks and bonds.
“The amount of cash, the amount of bank deposits and money markets that exist today is shocking,” Rob Goldstein, BlackRock’s chief operating officer, said in an interview with Reuters NEXT on Tuesday. “Money will flow into the capital markets, both public and private.”
Futures linked to the Fed Funds Rate show investors are pricing in 85 basis points in price cuts by December 2025. A US inflation report on Wednesday reinforced expectations that the Fed will cut rates at its monetary policy meeting next week, sending stock prices to new records .
OPPORTUNITY COST
For cash holders, there is an “opportunity cost” at some point, Kate El-Hillow, global chief investment officer at Russell Investments, said during a Reuters Next panel.
El-Hillow cited securitized assets as an example of an income-producing investment that could be preferable to cash, in part because of the potential to earn higher interest rates than in the money markets.
Equities have outperformed cash 86% of the time over all ten-year periods tracked by strategists at UBS Global Wealth Management, while bonds are 85% likely to outperform cash over the same periods, according to according to a study by the bank.
Meghan Graper, global head of debt capital markets at Barclays, said Fed cuts could help push money market investors into longer-dated bonds if short-term rates fall below long-term rates.
“That’s a significant amount of cash,” she says. “It could extend into the front of the maturities, and also into the belly of the curve.”
Of course, there is little guarantee that inflation will decline enough for the Fed to cut rates as sharply as the market currently expects.
While this week’s consumer price data for November was in line with economists’ expectations, it nevertheless showed that progress in reducing inflation has stalled.
More broadly, many investors expect interest rates to remain high compared to the previous decade, reinforcing the long-term attractiveness of cash.
“I almost think it’s satisfying that you could own cash and you could get a return that would have been unthinkable just a few years ago,” BlackRock’s Goldstein admitted.
“It’s an opportunity for the people who hold the money,” Goldstein said, “and I think it’s an opportunity for those who can imagine and demonstrate better uses of cash.”
(Reporting by Lewis Krauskopf, Lananh Nguyen, Tatiana Bautzer, Suzanne McGee and Ira Iosebashvili; Writing by Ira Iosebashvili; Editing by Rod Nickel)
