What ‘Higher for Longer’ Means for Cash Management in 2025

Published: March 31, 2025

Corporate treasurers have benefitted from a period of higher interest rates, but as central banks began cutting cycles last September, they are now keeping a close watch on how rates will move over the coming 12 months. Deborah Cunningham, CIO, Global Liquidity Markets, Federated Hermes, ponders possible outcomes.

With ‘sticky inflation’ and resilient consumer and employment figures, the interest rate outlook is drastically different from after the September meeting when the Federal Reserve (Fed) surprised the market by cutting 50 basis points (bps). From a Trump administration perspective, ‘fast and furious’ has been the theme of the first months of his presidency.

The new administration’s policy goals (immigration, tariffs and potential regulatory changes) appear to be inflationary in nature, bringing the Fed’s job from an easing perspective to a much lower threshold. Consumer and employment have been the driving forces of US GDP over the past several years and continue to show resilience.

Outlooks for the Fed’s interest-rate-cutting programme vary significantly, with those in the market that are expecting one or two hikes by year-end, while others foresee three or four cuts in 2025. These are extreme positions, with the most likely outcome to be one or two rate cuts by the end of this year, with the first one coming around May and a second one (if needed) not coming until the latter half of the year.
In contrast to the US, we expect the UK and Europe to be on a relatively faster easing cycle. However, the underlying data and economic drivers across dollar, sterling and euro currency regions show the US with the strongest GDP growth expectation, the UK somewhere in the middle, and Europe on the lower end of expectations.

But none of these economies are going into a recession and are not (at this point) suffering in the context of stagflation. So, what we see today for all three currencies versus six months ago is an outlook of higher rates for a longer period.

MMFs vs bank deposits

Against the backdrop of this ‘higher-for-longer’ rate environment, MMFs continue to play a role for treasury professionals, among whom there is a growing awareness that they are not just a holding station for cash but can offer other benefits. These include daily liquidity to support short-term cash requirements, a haven from market volatility in the equity or longer-term fixed income markets and, crucially, in a higher interest-rate environment, a compelling yield.

Some treasurers are putting their money into MMFs rather than bank deposits. Part of the attraction is that yields of most securities that funds and other vehicles hold are based on the market, rather than administered, meaning they tend to track central bank moves. The rate for an MMF or a liquidity product, is a weighted average of the market-based security rates that are in that portfolio to determine what the actual rate of the overall fund is.

This provides full disclosure of what the securities are that are held within those portfolios, the diversification, the credit quality, the weighted average maturity constraints. With full transparency around how that rate is determined and what it comprises , a treasurer can see what to expect given current market conditions and what will be rolling off from a maturity perspective within those funds.

Contrast that to an administered rate, which is what a bank provides, and it’s drastically different. An administered rate is one that will reflect the direction of interest rates. So, if the Fed is raising interest rates, generally they will go up with an administered rate. It’s with a lag, and it’s not with the same amount. When the Fed raised interest rates by 75 bps back in 2022, banks raised interest rates by only a fraction of that. That direction of travel was correct, but the speed and the velocity at which it occurred was not necessarily reflective of that.

Similarly, when you look at disclosures from a banking perspective, you don’t know what is behind that administered rate. It is not the same type of disclosure on a regular basis, nor does it have the same type of constraints that are risk mitigants in the context of an MMF.

While pleased with the returns they’ve garnered during this period of higher rate, few treasurers have forgotten about the decade of near-zero yields. Many will be content if the rates remain higher but stable for longer, especially those who use cash primarily as a tool to pay expenses and other needs. That’s why we’re not seeing evidence that investors are chomping at the bit to deploy all their cash to stocks and bonds as yields decline – as we expect MMFs will continue to offer a compelling proposition for treasurers in the year ahead.