Jeff..
I think your questions are good ones because the portfolio consequences of being the wrong way vs. the Fed's next tightening could be severe. That said, it appears you expect that tightening cycle may begin a good deal earlier than I do. Nonetheless:
1. I think at the first whiff of possible Fed tightening, the curve will flatten dramatically while the long end moves up moderately. That's when I will dive into (per your query) money market funds, waiting patiently for opportunities to deploy cash in higher yielding longer instuments.
2. When Fed begins to tighten, I'll get out of my inflation protected component as well...anticipating that TIPs-ish assets will suffer not only from the general rising rate environment but also from anticipation of the rate-hike program's ultimate success in reducing inflation.
3. All that said - and while I commend your attention to appropriate strategies for future Fed tightenings - I think a more immediate problem is how those of us with high fixed income portfolio allocations should deal with/optimize what is likely to be a protracted period of stable and slightly lower short term (Fed-managed) rates. Delevering the US/global financial structure will IMO take at least a couple years, and any Fed rate increases undertaken before deleveraging is complete would be both devastating and short-lived.
Dick
