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(Reuters) – Wall Street executives at Reuters Next (LON: ) conference in New York expects the $7 trillion cash pile that has proved invulnerable to a rate cut in 2024 will begin to melt away next year as easier monetary policy tempts clients from the ultra-conservative asset class.
So far, such hopes have been in vain. Cash in the money markets has grown by about $824 billion this year, according to Crane Data, a bright prospect that will find a home in stocks or bonds as the Federal Reserve begins to cut rates.
Proponents of the asset class said they were happy to earn rates of around 4% – far above the near-zero yield that cash paid just a few years ago – with relatively little risk. But sitting on the sidelines comes at a price: the price is up about 27% this year, gold is up about 30% and the small-cap is up more than 17%.
Cash in the money markets was $7.124 trillion as of Dec. 5, according to Crane Data.
Some on Wall Street believe some could be reallocated in 2025 as rate cuts reduce money market yields and the opportunity cost of staying out of stocks and bonds rises.
“The amount of cash, the amount of bank deposits and the money market, that exists right now is shocking,” Rob Goldstein, chief operating officer of BlackRock ( NISE: ), said in an interview with Reuters NEXT on Tuesday. “Money will come to the capital markets, both public and private.”
Fed funds rate futures show investors are pricing in an 85 basis point cut by December 2025. Wednesday’s U.S. inflation report reinforced expectations that the Fed will cut rates at its monetary policy meeting next week, sending stocks to new record.
CONSIDERABLE EXPENSES
For cash holders, “there is an opportunity cost at some stage,” Kate El-Hilou, global chief investment officer at Russell Investments, said during a Reuters Next panel.
El-Hillov cited securitized assets as one example of an income-generating investment that may be preferable to cash, in part because of the potential to earn higher rates than the money market.
Stocks beat cash 86% of the time over all 10-year periods tracked by strategists at UBS Global Wealth Management, while bonds were 85% more likely to beat cash over the same periods, the bank’s study found.
Meghan Graper, global head of debt capital markets at Barclays ( LON: ), said the Fed’s cuts could help push money market investors into longer-term bonds if short-term yields fall below long-term yields.
“That’s quite a lot of cash,” she said. “It could start to extend to the front maturities and also the belly of the curve.”
Of course, there are few guarantees that inflation will ease enough for the Fed to cut rates as much as the market currently expects.
Although November’s consumer price data released this week were in line with economists’ expectations, they did show that progress in reducing inflation has stalled.
More broadly, many investors expect interest rates to remain elevated relative to the previous decade, strengthening the long-term appeal of cash.
“I almost think it’s a satisfying thing to be able to own cash and be able to get returns that would have been unthinkable a few years ago,” BlackRock’s Goldstein acknowledged.
“It’s an opportunity for people holding cash,” Goldstein said, “and I think it’s an opportunity for those who could come up with and demonstrate better uses for cash.”
