Wall Street Executives Discuss Cash Pile at Reuters Next Conference

(Reuters) – Wall Street executives at the Reuters Next (LON:NXT) conference in New York predict a $7-trillion cash pile, which remained strong against falling interest rates in 2024, may begin to decrease next year. Easier monetary policy is expected to entice clients away from the conservative asset class.

Despite this optimism, cash in money markets has increased by about $824 billion this year, as reported by Crane Data. This rise defies expectations that it would be invested into stocks or bonds following the Federal Reserve's rate cuts.

Supporters of cash investments are satisfied with earning around 4%—significantly higher than the near-zero returns seen previously. However, staying on the sidelines has had its consequences: the S&P 500 is up approximately 27% this year, gold has increased about 30%, and the Russell 2000 Index of small-cap companies has risen over 17%.

As of Dec. 5, cash in money markets totaled $7.124 trillion according to Crane Data. Some Wall Street analysts think part of this cash could be redirected in 2025, as rate cuts lower money-market yields, increasing the opportunity cost of remaining outside stocks and bonds.

Rob Goldstein, BlackRock’s chief operating officer, remarked in an interview at Reuters NEXT, "The amount of cash, the amount of bank deposits, and money markets that exists right now is shocking. Money is going to come into capital markets, both public and private."

Futures linked to the Fed funds rate indicate investors are expecting 85 basis points in rate cuts by December 2025, bolstered by a recent U.S. inflation report that enhances expectations of upcoming Fed rate cuts and drives stock prices to new highs.

Opportunity Cost

Kate El-Hillow, global chief investment officer at Russell Investments, highlighted that cash holders face an "opportunity cost at some stage." She mentioned securitized assets as an example of potentially more lucrative income-generating investments that exceed cash rates.

According to UBS Global Wealth Management, stocks have outperformed cash 86% of the time across all 10-year periods, while bonds have outperformed cash 85% of the time.

Meghan Graper, global head of debt capital markets at Barclays (LON:BARC), noted that Fed rate cuts could incentivize money-market investors to shift into longer-duration bonds if short-term yields dip below longer-term ones, suggesting this cash could start moving into various maturities.

Nevertheless, there’s no certainty that inflation will decrease sufficiently for the Fed to implement the anticipated rate cuts. November's consumer price data matched economists’ expectations but indicated that progress in reducing inflation has stalled.

Overall, many investors believe interest rates will remain higher than they were in the prior decade, increasing the long-term allure of cash. "It's satisfying to own cash with returns that seemed unimaginable just a few years ago," acknowledged BlackRock’s Goldstein. He added, "It's an opportunity for cash holders and for those who can find better uses for this cash."