The Federal Reserve is about to restart rate cuts after a year, and Wall Street's focus is shifting from inflation pressures to another massive market force—the $7.6 trillion money market funds. Over the past year, high yields from rate hikes have rapidly expanded this pool of funds, but with the start of the rate-cutting cycle, declining returns are inevitable.

The market widely expects the Fed to cut rates by 25 to 50 basis points at next week's FOMC meeting. This means the appeal of risk-free cash investments will gradually weaken, forcing investors to rethink their asset allocation strategies. Weak employment data, rising unemployment risks, and inflation that, while not fully subdued, is no longer sufficient to prevent a policy shift, have laid the groundwork for rate cuts.

Analysts point out that a portion of the massive money fund assets may flow into stocks and bonds, boosting risk assets. However, not all funds will be moved. Peter Crane, president of research firm Crane Data, cautions that historical experience shows money fund sizes only shrink during extreme economic recessions and zero-interest-rate environments. Currently, over 60% of the funds come from institutional and corporate cash, which has high liquidity needs and is unlikely to flow into the stock market on a large scale. He estimates that at most, only 10% of the funds might enter risk assets.

The average annualized yield of money market funds remains at 4.3%, far higher than bank deposit rates. Even if cumulative rate cuts reach 100 basis points, bringing yields down to 3%, their competitiveness will remain significant. Unless the zero-interest-rate era returns, large-scale outflows are unlikely. In the short term, as the high-yield assets held by money funds have not yet matured, the fund size may even continue to grow.

In the long run, as older assets gradually mature and yields decline, some investors may reallocate their funds. Strategist Todd Sohn suggests that investors consider extending bond duration to capture higher coupons and price appreciation opportunities through bond ETFs. At the same time, in equities, they should avoid overconcentration in large-cap tech stocks and moderately increase allocations to small and mid-cap stocks or international markets. Additionally, diversification through alternative assets can help spread risks.

Overall, rate cuts will reshape the market landscape, but the $7.6 trillion in funds will not flood into the stock market overnight. Their flow is more likely to be a gradual and differentiated process.