The Federal Reserve's actions and their impact on various financial markets have been a topic of great interest. Torsten Slok from Apollo has made significant predictions regarding the Fed's easing cycle and its effects on money-market funds. Since the Fed began raising rates in 2022, assets held in money-market funds have surged to record levels. However, now that the central bank has started cutting rates, a significant shift is expected.

Unraveling the Fed's Easing Cycle and Its Impact on Money-Market Funds

Impact of Fed's Easing Cycle on Money-Market Funds

Apollo's Torsten Slok emphasizes that the Fed's easing cycle will fuel a rotation out of money-market funds. As the firm's chief economist points out, the Fed's interest-rate hikes from March 2022 to September 2024 pumped a substantial $2 trillion into money-market accounts. This led to assets held in money-market funds reaching an all-time high of $7 trillion this month. Now, with the central bank cutting rates, this accumulated money is likely to move out of these accounts and into higher-yielding assets.This movement is not without implications. While some may expect stocks to benefit directly from this rotation, Slok suggests that instead, it will result in inflows into the credit markets. In a Tuesday note, he wrote, "Where will the $2 trillion added to money market accounts go now that the Fed is cutting? The most likely scenario is that money will leave money market accounts and flow into higher-yielding assets such as credit, including investment grade private credit."

Credit Markets and Inflows After the Election

In an earlier note, Slok highlighted that credit markets appear well-positioned for further inflows after the election. He stated, "We expect credit fundamentals to remain robust. This combined with elevated all-in yields and steep yield curves should continue to attract inflows into credit, which should support valuations even though room for further compression is getting more limited." This indicates that despite some limitations, credit markets are likely to attract significant funds in the coming period.However, Slok's prediction may disappoint stock bulls who were hoping for a fresh rally in equities due to the rotation out of money-market funds. Goldman Sachs analysts, on the other hand, believe that investors should still favor stocks over bonds in a Fed easing and strong economy-driven pro-risk, late-cycle environment. In a note last month, they said, "During late-cycle backdrops, equities can deliver attractive returns driven by earnings growth and valuation expansion, while credit total returns are usually constrained by tight credit spreads and rising yields."This shows the complex interplay between different financial markets and the expectations surrounding them during different economic cycles. The Fed's actions and the subsequent movements in money-market funds and other asset classes will continue to shape the investment landscape and require careful analysis and decision-making.