ARTICLE 2: Cash Is No Longer King
- Grayson O'Hara '25
- Oct 28, 2024
- 2 min read
By Grayson O'Hara
When the Federal Reserve raised interest rates in 2022, most brokerages struggled to make money from customers' idle cash due to inflation and these high rates. Previously, brokerages could move this cash to banks for a small fee or invest it internally at a low cost, generating higher returns. However, as rates rose, investors shifted their cash to high-yield savings accounts or money market funds, which offered better returns.
Recently, with the Fed signaling possible rate cuts, this cash outflow has slowed or even reversed. In September 2024, Charles Schwab reported $17 billion in net cash inflows, while Morgan Stanley and Bank of America showed signs of stabilization. Despite these improvements, brokers still face challenges: customers continue to seek higher yields, forcing adjustments in cash sweep rates. Regulatory scrutiny, lawsuits, and compliance costs also create pressure in handling uninvested cash.
Brokers have begun relying more on trading activities, particularly bonds, and on a growing number of investors managing their own money to offset this pressure. As cash flows stabilize, earning significant returns at low costs remains challenging, prompting a focus on attracting new customers and assets.
I found this article both relevant and essential, given how interest rate cuts impact nearly every aspect of the U.S. banking economy. It’s surprising to see how many people actively seek better savings returns, especially with high interest rates. It makes sense, though—people naturally want to maximize yields on their savings. What also caught my attention is how brokerages adapt to this growing competition, which is particularly interesting as I start investing and monitoring returns on my savings and investments. The shift in cash flow returns is impressive but also a bit daunting.
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