Cash management and investing strategies when interest rates are changing

The combination of higher interest rates and volatile markets contribute to many investors’ decision to hold significant sums in cash-equivalent investments and short-term instruments. According to the Investment Company Institute, total money market fund assets held by investors now exceed $7 trillion. In March, the $7 trillion threshold was crossed for the first time in history. ¹

This continues an ongoing trend. After years of earning only modest interest in money market accounts, CDs, and U.S. Treasury bills, in recent years, investors began to capitalize on more attractive yields on such instruments. Eventually, short-term securities like 3-month U.S. Treasury bills paid yields exceeding 5%. ² The Federal Reserve (Fed) drove the sudden jump in yields by dramatically increasing the short-term federal funds target rate it controls over a period of little more than a year.

While short-term yields have dropped modestly from peak levels, they remain elevated and still attractive to investors. But are investors holding too much money in cash-equivalent vehicles?

Choosing short-term safety over long-term potential

Historically, it isn’t unusual for investors to allocate more funds to cash during periods of capital market volatility. In 2022, as the Fed raised interest rates to cool the economy and temper rampant inflation, equity markets lost considerable ground. In a matter of ten months, the S&P 500 Index dropped 25%. ³ During such challenging periods, investors often look to move money out of stocks and into investments that offer less short-term risk.

Investors’ exodus to money market funds and similar instruments began in force and remains in play today. However, those investors who moved money out of stocks and continued holding cash sacrificed significant wealth accumulation potential in 2023 and 2024. In each of those two years, the S&P 500 generated total returns exceeding 25%. ³

“While people became comfortable with higher yields on savings, over time, they’ll find they are likely better off diversifying into long-term assets such as equities,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “Investors should be aware that as the Fed lowers interest rates, yields on cash-equivalent instruments will fall, meaning there is an even bigger opportunity cost to keeping long-term money tied up in short-term investments.”

Will the Fed cut rates?

A key question for anybody holding significant cash positions is where interest rates go from here. In late 2024, the Fed cut the fed funds target rate by 1%, to a range of 4.25% to 4.5%. Through June 2025, the Fed has held the line on interest rates, but investors project at least another 0.50% in rate cuts later in the year. ⁴

Rate cuts priced in by the market and projected by the Federal Reserve

The Fed’s 2024 rate cuts prompted a decline in U.S. 3-month Treasury yields. While rates stabilized in 2025’s first half, the trend indicates further Fed rate cuts will likely reduce yields on short-term securities.

Investors who have a sense of caution about putting long-term, investable assets to work in equities or bonds may find that caution is not rewarded. “Investing is about getting paid for uncertainty,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. “The idea is that while there are no guarantees about short-term returns, you will be rewarded either for lending your money to a business or government entity (bonds) or participating in a corporation’s future growth (equities).”

While investors in equities and fixed-income instruments must be prepared for periods of market volatility, Hainlin says they should remain determined. “The unknown is always on the horizon and at no point will you be absolutely certain the time is right,” notes Hainlin. “That’s why we recommend investors invest in a way that’s consistent with a plan they’ve established and maintain the discipline to follow the plan.”

Haworth also notes that along the way, changes may be appropriate. “It’s important to regularly rebalance a portfolio to reflect how market performance has changed your asset mix and bring it back to the intended allocation based on your risk tolerance, time horizon and goals,” says Haworth.

Consider your cash management and investing opportunities

It is not possible to predict with accuracy what to expect of the equity and bond markets in the near term. But if you have long-term financial goals, you should seek reasonable opportunities to put cash to work in ways that will help you achieve those objectives. There is no single solution for every investor, but you can focus on strategies that reflect your risk appetite, time horizon and goals.

Review your financial plan with a wealth professional and explore cash management opportunities – along with your long-term investing goals – to help you capitalize on today's interest rate environment..

Note: The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.