This may not be an era in which Americans are awash in physical currency fattening their wallets, but we are awash in cash parked inside accounts that have been generating attractive yields thanks to Federal Reserve interest rate hikes to combat inflation. There is a record amount of cash in money market funds, roughly $7.6 trillion, according to Crane Data.
But as the Federal Reserve prepares to cut rates for the first time in a year, maybe by as much as 50 basis points — a policy shift that will, over time, reduce the yields on risk-free cash-equivalent investments — market attention has shifted to whether that cash will be on the move. At the most extreme, Wall Street’s so-called “wall of cash” theory — which claims that all that cash on the move can create its own stock market rally — has been debunked about as many times as it has been offered.
At the very least, it is a significant moment of change in Federal Reserve rate policy. The latest jobs market data confirmed mounting fears of a labor market heading in the wrong direction and the need for the central bank to move sooner rather than later before unemployment spikes. Meanwhile, the latest inflation data, while far from an all-clear on pricing pressures throughout the economy, did not suggest the Fed will hold off on at least a 25 basis point rate cut next week.
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