76 trillion yuan funds stand by, how will the Fed's interest rate cut reshape the market pattern?

As the Federal Reserve's first interest rate cut in over a year approaches, Wall Street's focus is shifting from inflation pressure to a larger potential market force - approximately $7.6 trillion in Money Market Fund assets. According to data from Crane Data, this record-breaking fund size has benefited from high yields due to the Fed's rate hikes over the past year, but is now facing pressure as returns decline with the start of a rate-cutting cycle. The market widely expects the Federal Reserve to cut rates by at least 25 basis points at next week's FOMC meeting, and possibly even a 50 basis point cut. This policy shift will gradually lower the returns on risk-free cash investments, prompting investors to reevaluate their fund allocation strategies. The latest job market data shows clear signs of weakness in the US labor market, with the risk of rising unemployment increasing. At the same time, while the latest inflation data has not completely eliminated price pressures, it is not enough to prevent the Fed from starting the rate-cutting process. Chief Economist of the Investment Company Institute (ICI), Shelly Antoniewicz, stated, "The latest job data essentially locks in the need for a rate cut." She expects that the pace of future rate cuts by the Fed will continue to depend on economic data, especially the performance of employment and inflation. Antoniewicz pointed out that with the start of rate cuts, the approximately $7 trillion currently held in money market funds will gradually flow into higher-risk, higher-potential return assets such as stocks and bonds, as savings rates gradually lose their appeal. On Wall Street, there is a theory called the "Wall of Cash", which suggests that the massive cash flow will fuel a self-sustaining upward trend in the stock market. However, Peter Crane, President of Crane Data, expressed doubts about this. Crane pointed out that historical data shows that money market fund assets only decline in extreme economic recessions or when interest rates are close to zero, such as during the burst of the dot-com bubble and the 2008 financial crisis. "Interest rates are indeed important, but far less crucial than people imagine," Crane stated. "The current $7 trillion will not flow out, it will only continue to grow." Crane also revealed that approximately 60% of money market fund funds are from institutional and corporate cash, which have high liquidity needs and will not enter the stock market on a large scale due to interest rate changes. He expects that at most only 10% of funds may flow into higher-risk investment areas. Currently, the average annualized return on money market funds is 4.3%, compared to less than 0.5% interest rates on bank deposits, which still holds great appeal. Crane believes that even if the Fed cumulatively cuts rates by 100 basis points in the future, reducing the yield to 3%, most of the funds will still remain in money market funds. "Unless we return to a zero-interest-rate environment like in history, the fund size will not shrink significantly." Historically, investors have focused more on yield differentials than absolute levels. Compared to bank deposits, money market funds still offer more competitive returns. Even if the Fed announces a rate cut next week, fund flows will not happen immediately. The weighted average maturity of money market funds is 30 days, meaning their high-yield assets will gradually mature within a month. Therefore, in the short term, the fund size may even further increase, as its returns are still higher than newly issued US Treasury bonds. However, in the long term, as old assets mature and yields decline, the attractiveness of funds will gradually decrease, and some investors may reconsider their investment portfolios. Todd Sohn, Technical Strategist at Strategas Asset Management, advises investors to consider risk preferences and tax considerations when deciding on fund transfers: 1. Lengthen bond duration by investing in 2 to 5-year US Treasury ETFs to offset short-term yield declines by gaining higher coupon rates and potential price appreciation; consider using a "Bond Ladder" ETF to diversify different maturities and reduce volatility risk. 2. Increase equity allocation by considering adding mid-cap or international market exposure instead of continuing to add to large tech stocks, as Sohn warns that the top eight tech stocks currently account for nearly 40% of the total US stock market value, so further increasing exposure should be done cautiously. 3. Diversify investments by allocating to alternative assets with low correlation to the stock and bond markets to spread risk.