US liquidity’s golden run won’t end in 2025: Analyst

After a bumper three years, US liquidity and money markets are widely expected to end their golden run in 2025. However, a leading analyst has countered this narrative, predicting liquidity will remain “king” through 2025.

Federated Hermes 2025 Outlook sees a continued strong showing for liquidity this year, boosted by above-Fed rate yields and a slew of favourable Trump administration policies.

Since the Federal Reserve raised its cash rate in March 2022 from its low water mark of 0.25%, industry money market assets alone have increased more than US$2 trillion, with yields riding the most rapid rate hike in decades.

Federated Hermes’ chief investment officer for global liquidity markets Deborah Cunningham notes the continued attractiveness of liquidity products even as rates decline, with investors capitalising on high yields.

“[Cash] managers construct liquidity portfolios with securities maturing as far out as a year. In a declining-rate environment, these portfolios often have higher yields than the current Fed target range.

“In theory, this would slow the decline of portfolio yields higher for longer, keeping liquidity products attractive. The latter seems to be happening.”

Cunningham notes that, since the Fed’s half-point rate cut last September, around US$300 billion of assets have moved into money funds.

After years of ultra-low cash rates, including the post-GFC recovery and Covid period declines, Cunningham notes that money market investors will be “more than happy” to see rates stabilise at a neutral 3.5%, particularly for those using cash primarily as a tool to pay expenses and other needs.

“That’s why we don’t buy the narrative that investors are chomping at the bit to deploy all their cash to stocks and bonds as yields decline. Liquidity is king.”

Finally, a raft of – likely inflationary – policy promises from the incoming Trump administration could bode well for money markets, Cunningham believes.

Trump’s promise to slash taxes, cut immigration, increase government spend, and enact tariffs would likely rekindle inflation, with policymakers expected to relent on its monetary easing, potentially keeping liquidity yields higher for longer.

Federated Hermes predicts this would likely lead to a more complicated and bond-unfriendly environment.

“For spread markets, positive growth policies could benefit corporate debt, but increased volatility may impact returns.”

However, geopolitical shifts and aggressive tariff policies could disrupt markets, creating new opportunities in non-US developed and emerging markets.

President Trump’s pro-growth agenda, including lower corporate tax rates and reduced regulatory burdens, could deliver a boon for the US equities market in the short- to medium-term, leveraging the current strength of the US economy.

As a result, Federated Hermes anticipates a continued strong run for the US market through 2025, with a preference for large cap value and small cap stocks.

Private Markets are also expected to continue their growth trajectory.

“We expect private debt to continue to offer compelling returns for investors in 2025, for those looking in the right parts of the market.

“With inflation seemingly back under control, private equity activity has also resurged, and we expect to see continued improvement in deal flow, exits and multiples.”