While Americans may not be walking around with cash-filled wallets these days, they are sitting on record amounts of money stashed in money market funds. According to Crane Data, these funds now hold about $7.6 trillion — a reflection of how investors have taken advantage of attractive yields created by the Federal Reserve’s campaign of rate hikes to fight inflation.

But that environment could soon change. With the Fed expected to lower interest rates for the first time in a year — possibly by as much as half a percentage point — investors are beginning to wonder what will happen to that mountain of cash. Lower rates mean lower yields for money market funds and other cash-equivalent investments, potentially prompting investors to move their money elsewhere.

Some market optimists on Wall Street have long floated the idea that such a massive “wall of cash” could ignite a new stock market rally if it starts flowing into equities. Yet this theory has been repeatedly challenged and disproven, as similar predictions in past rate-cutting cycles failed to materialize.

Still, the Fed’s upcoming decision marks a significant shift in monetary policy. Recent job market data showed signs of weakening employment conditions, while inflation — though still elevated — has eased enough to justify at least a modest cut. For many economists, these signals make a rate reduction next week almost inevitable.

“The payroll numbers really make the case for a rate cut,” said Shelly Antoniewicz, chief economist at the Investment Company Institute, during an appearance on CNBC’s ETF Edge. Like many analysts, she emphasized that the pace of future rate cuts will depend on how inflation and labor data evolve.

Antoniewicz also noted that as rates decline, the roughly $7 trillion in money market funds could gradually move toward riskier assets such as equities and bonds. Once the returns on cash accounts become less appealing, investors often seek higher yields elsewhere.

Meanwhile, mutual fund companies are preparing for a major regulatory decision by the Securities and Exchange Commission (SEC) that could reshape the industry. The SEC is considering a proposal that would allow every fund provider to offer an ETF share class alongside their traditional mutual fund products. Antoniewicz said about 70 applications are already under review, and many asset managers are ready to move forward once approval is granted.

Despite such expectations, Peter Crane, president of Crane Data, remains skeptical that much of this cash will move anytime soon. “Money fund assets have grown consistently for decades,” he said, noting that they only decline during extreme economic downturns, such as after the dot-com collapse or the 2008 financial crisis, when rates dropped to near zero.

According to Crane, while interest rates do matter, they play a smaller role than most people assume. Even if the Fed cuts rates this year, he expects money fund balances to continue rising — unless the U.S. economy faces another severe contraction. “The idea that all this cash is going to pour into the stock market? Dream on,” he said.

Crane also highlighted that the composition of money market investors has changed dramatically. Once dominated by retail investors, the market is now primarily institutional, with about 60% of the funds belonging to corporations. “That money isn’t going anywhere,” he said. “Corporations aren’t moving their liquidity into the S&P 500.”

To be fair, Crane doesn’t deny that some portion of the $7 trillion might move into riskier assets. But he estimates that no more than 10% would do so — a small fraction compared with the overall market. He also pointed out that American households still hold around $20 trillion in regular bank deposits that yield almost nothing, suggesting that even after rate cuts, money funds will remain a relatively attractive option.

“The real question is how large the rate gap is,” Crane said. “When cash investors remember that not long ago, rates were zero, a quarter-point drop doesn’t change much.”

Currently, money market funds are paying about 4.3% annually. Even if the average yield falls to 3%, Crane argues, that’s still far better than the 0.5% most banks offer. “Bank deposits underpay massively,” he said.

For a significant amount of cash to leave these funds, Crane believes the Fed would need to slash rates all the way back to zero — a scenario that would likely accompany a major economic downturn. “Until that happens, the base will remain solid,” he said.

Another reason investors are unlikely to make big moves is that individual account sizes in money market funds tend to be small. For someone with $5,000 invested, the difference between earning 4% and 3% may not justify the time and effort of reallocating assets. “You spend more thinking about it than you’ll earn,” Crane joked.

At the same time, volatility in the bond market has made traditional fixed-income investing riskier. As yields fluctuate, investors who take on longer-duration bonds face potential losses if rates change abruptly.

So what should investors do as the Fed begins lowering rates?

Todd Sohn, a technical and ETF strategist at Strategas Asset Management, believes that the right approach depends on risk tolerance and tax considerations. “If money market yields start drifting toward the low 3% range, the after-tax return becomes less appealing,” he said. “But if you’re risk-averse, keeping your money there is perfectly fine.”

For those seeking alternatives, Sohn suggests extending slightly along the Treasury curve — perhaps into ETFs holding two- to five-year U.S. Treasury bonds. Although this introduces some duration risk and price volatility, investors avoid credit risk and may benefit from modest price appreciation.

He also recommends considering “bond ladder” ETFs, which spread investments across multiple maturities to reduce volatility. “A well-balanced ladder can smooth returns and lower risk,” Sohn said, noting that overly concentrated bond positions have hurt many investors in recent years.

Some investors may prefer to add to their stock holdings or explore noncorrelated assets such as commodities or alternatives. However, Sohn cautioned that most portfolios are already heavily exposed to large-cap technology stocks, which now make up nearly 40% of the total U.S. equity market.

“If you see gaps in your equity allocation, look for small-cap, mid-cap, or international exposure,” he said. “There are plenty of low-cost ETF options to help diversify without overconcentrating in tech.”

Ultimately, while the Fed’s policy shift marks the beginning of a new cycle, history suggests that America’s enormous pile of cash won’t disappear overnight. As Crane put it, “Rates may fall, but the $7 trillion isn’t going anywhere fast.”