Fed Poised to Cut Rates: Will $7.6 Trillion in Money Market Funds Stay Put or Flow Into Stocks?

As the U.S. Federal Reserve (Fed) prepares to deliver its first interest rate cut in more than a year, global investors are closely watching a record sum sitting in money market funds. According to Crane Data, assets in these funds have reached $7.6 trillion, raising the question: will this “wall of cash” remain parked in safe havens, or will it shift toward riskier assets such as equities and bonds once rates decline?

Money Market Funds: The Safe Haven of the Rate-Hike Era

Over the past two years, the Fed’s aggressive rate hikes aimed at taming inflation have turned money market funds into one of the most attractive destinations for both retail and institutional investors.

Currently, these funds yield an average return of around 4.3% annually, far outpacing the meager 0.5% offered by traditional bank deposits. This nearly ninefold difference has been the key driver behind the massive inflows into money market products, positioning them as the go-to choice for investors seeking both stability and competitive returns.

The Upcoming Rate Cut: A Turning Point for Trillions?

Market consensus suggests the Fed could lower interest rates by 25 to 50 basis points in its upcoming meeting. This prospect has sparked debate on whether the trillions held in money market funds will start migrating to other asset classes.

The “Wall of Cash” Theory on Wall Street

According to the popular “wall of cash” thesis, once interest rates fall, investors will reallocate money from safe-haven funds into equities and corporate bonds, fueling a broad rally across financial markets.

Shelly Antoniewicz, Chief Economist and ETF researcher at the Investment Company Institute (ICI), told CNBC’s ETF Edge: “The latest jobs data shows a weakening labor market, reinforcing the case for the Fed to cut rates soon. Once that happens, we should expect part of this $7 trillion to gradually flow into riskier assets like stocks.”

The Contrarian View: “That Money Isn’t Going Anywhere”

However, not all experts buy into this bullish scenario. Peter Crane, President of Crane Data, countered: “That’s just Wall Street’s dream. It makes for a good story, but the $7.6 trillion isn’t moving anywhere – in fact, it’s likely to grow further.”

Crane points to history: in the 52-year history of money market funds, assets have only declined meaningfully during two extraordinary crises – the dot-com bust and the 2008 financial meltdown, both periods when interest rates fell to zero.

Interest Rate Differentials: The True Deciding Factor

According to Crane, the stickiness of money in these funds has less to do with absolute rate levels and more to do with the spread between fund yields and bank deposits.

Money market yields: ~4.3% annually

Bank deposits: ~0.5% annually

Even if the Fed trims rates to 3.8%, this gap remains compelling. As Crane explains: “Investors aren’t going to move for a 0.25% change. They’ve already endured zero interest rates before and got nothing.”

Importantly, around 60% of assets in money market funds today belong to institutions and corporations, groups that typically hold cash for liquidity and operational purposes rather than chasing higher-risk returns. “These players don’t suddenly pivot to equities,” Crane emphasizes.

Lagged Effects: Markets Won’t React Overnight

Unlike U.S. Treasuries, which reprice instantly, money market funds have an average maturity of about 30 days. This means their yields adjust gradually, not immediately, following a Fed move.

In fact, Crane notes that in the short term, a Fed rate cut could make money market funds even more attractive. Because funds still hold older, higher-yield securities for a few weeks, they may temporarily outperform other assets whose yields drop immediately after the policy shift.

Over the long run, however, lower rates will inevitably compress returns. Still, Crane insists this won’t necessarily trigger mass outflows. Investors may simply increase allocations to both money market funds and equities simultaneously, depending on their personal goals and risk tolerance.

Implications for Stock Market Investors

1. Don’t Expect a Massive Flood Into Equities

History shows that money market assets rarely leave en masse, except during severe crises. Equity investors should temper expectations of a sweeping “cash wall” unleashing a bull market.

2. Limited but Significant Impact

If outflows occur, analysts estimate only 5–10% of total fund assets might rotate into stocks. Yet even this modest share of $7.6 trillion could provide a meaningful boost to equity markets.

3. Long-Term Tailwinds From Fed Easing

Rate cuts traditionally support equity performance over a 12–18 month cycle. Long-term investors may find opportunities in gradually building positions rather than waiting for dramatic shifts in fund flows.

4. Focus on Macro Data, Not Just Cash Levels

Key indicators such as inflation (CPI), labor market strength, GDP growth, and Fed guidance will ultimately dictate both money market yields and equity market direction.

The Bigger Picture

The Fed’s anticipated rate cut may alter the investment landscape, but the narrative of trillions instantly flowing from money market funds into stocks appears overstated. With yields still far superior to bank deposits, and with institutional investors making up the bulk of fund holders, the stickiness of cash in these vehicles remains high.

For investors, the key takeaway is to maintain realistic expectations. Rather than betting on a wholesale shift, focus on the broader context: a Fed easing cycle that typically favors equities, alongside the enduring role of money market funds as a safe and liquid anchor in portfolios.