While Americans might not have a lot of cash in their wallets, there is plenty of money sitting in accounts that are earning good interest due to the Federal Reserve’s rate increases aimed at fighting inflation. Money market funds hold a record amount of cash, about $7.6 trillion. As the Federal Reserve gets ready to lower rates for the first time in a year, possibly by 50 basis points, this change in policy will eventually lead to lower yields on safe cash-equivalent investments.

Meanwhile, the market is now focused on whether that cash will start to flow. At its most extreme, the idea of a “wall of cash”— which suggests that all that cash in circulation can spark a stock market rally — has been disproven as many times as it has been proposed. This is an important point of change in the Federal Reserve’s rate policy. The most recent jobs market data has confirmed worries about a labor market that is not improving, highlighting the need for the central bank to act quickly to prevent a rise in unemployment. At the same time, the newest inflation figures, although not indicating a complete resolution of pricing pressures in the economy, did not imply that the Fed will refrain from implementing at least a 25 basis point rate cut next week.

Shelly Antoniewicz, stated earlier this week that the payrolls data strongly supports the argument for a rate cut. She stated that, like many market experts, the speed of those cuts will depend on data as the Fed monitors the labor market and inflation, while balancing its goals of full employment and price stability. She mentioned that as the Fed begins to reduce rates, the approximately $7 trillion currently in money market funds will slowly move into riskier assets like stocks and bonds, since savings rates will become less appealing. More mutual fund companies are likely to pursue those assets as the Securities and Exchange Commission is about to make a significant decision. This decision could enable every asset management company to provide an ETF share class for their funds. There are 70 applications pending with the SEC for exemptive relief. The ICI, which is the main trade group for the mutual fund industry, is collaborating with many fund sponsors to get ready to introduce an ETF share class if the SEC gives the green light.

Peter Crane, has heard similar arguments before regarding the Fed and money market funds. His straightforward response is that money fund assets continue to grow. The only times they have decreased in recent history is when rates are at zero during economic crises. “The rates are important, but not as much as many think,” Crane said. Throughout the 52 years of money market funds, assets have only decreased following the dotcom bust and the financial crisis. These were times of significant economic stress that resulted in extremely low rates, described as a “bottom of the rate cycle nailed to zero,” he stated. If the economy worsens to the point where the Fed needs to make significant cuts sooner rather than later, it doesn’t indicate that investors will be eager to take on more risk. “Keep dreaming on Wall Street,” Crane stated. “It’s a nice topic to discuss, but the $7 trillion is only going to increase.” Over time, the use of money market funds has changed. What used to be mainly for retail investors is now mostly used by institutions and corporations, making up about 60% of the market, based on Crane’s data. “They are staying put, regardless of the situation,” he said. “They are not investing in the stock market.” Money fund researchers like Crane acknowledge that lower rates are important. He suggests that perhaps 10% of the over $7 trillion in money fund assets could shift to riskier, higher-return areas of the market. However, he notes that there is no exact data to support this estimate. When you think about the approximately $20 trillion that Americans keep in bank deposits, essentially allowing Wall Street to invest their money and earn returns while they earn nothing in return, a 25 basis point reduction in the current interest rates doesn’t really make money funds a non-viable choice.

“It’s more about how significant the rate difference is,” he said. “A quarter-point to cash investors, who remember when rates were zero and were used to receiving nothing?” he asked. At what point will investors start paying attention to yield again? At present, investors in money funds are seeing an average annual return of 4.3%. Crane mentions that even if rates drop to 3%, it’s not guaranteed. Many view a 100 basis point cut by the Fed as a bold move, unless there’s a significant economic downturn. A lot of money is likely to remain where it is, particularly when considering the low interest rates banks offer for holding cash, which might be around 0.5% at most. “Bank deposits pay very little,” he said. That’s why Crane thinks it will require a repeat of past Federal Reserve events for a large portion of that money to shift. “If you go to zero, there will probably be a decline in the foundation,” he said. The Fed lowered rates a year ago, but then stopped because of worries about inflation, and money fund assets have only increased since then. “If we reach 3.80% or 3.85%, will anyone really pay attention?” Crane stated. Moreover, while the total balance in the money fund market is large, the balances for each individual are usually quite small. According to Crane, if an investor has $5,000 in a money market fund earning 1% or 2% more or less, there are more important considerations for making money. “You’ve spent more money worrying about the issue than you’re making.” “Nothing is worth doing for less than 1% or one hundred dollars,” he added. Currently, the bond market is experiencing volatility, which means there is greater risk in fixed-income and treasuries than investors anticipated. This makes duration a riskier choice for investors.

It’s clear that the money fund market will remain stable next week following the Fed’s decision to lower rates. Money funds have a weighted maturity of 30 days, which is different from treasury bills. If the Fed cuts rates, treasuries will likely decrease in value. However, money funds will take about a month to fully adjust downwards since they still hold older securities that yield higher returns. In the near future, if the Fed announces a large cut, Crane anticipates that money market assets will increase for similar reasons. “However, in the long run, it is a downside,” he stated. “In the end, there is less interest being generated compared to other investments.” However, the ongoing record highs in the market and the increasing assets in money funds indicate that the situation is not one where gains in stocks negatively impact money markets.