Morgan Stanley
Wealth Management

Reconsidering Money Market Funds as the Fed Cuts Rates

Sep 22, 2025

How Fed rate cuts can affect your money market returns and what you should consider next.

Author:
Steve Edwards
Steve Edwards, Head of Portfolio Construction and Cross-Asset Strategy, Morgan Stanley Wealth Management

Key Takeaways

  • Federal Reserve rate cuts can mean lower returns on money market funds, as their yields historically track the Fed’s rate path.
  • Investors may want to consider reallocating money to longer-duration fixed income assets to lock in attractive yields at relatively lower risk.
  • Remember to maintain a long-term investment strategy that aligns with your financial goals, regardless of near-term interest rate shifts. 

With its latest cut, the Federal Reserve has now lowered its benchmark interest rate by 1.25 percentage points since September 2024—and more cuts are expected. How might this affect you? 

 

If you have excess portfolio cash in money market mutual funds, it may be time to consider moving it into other assets. Yields on money market funds historically have tracked the Fed’s rate path, meaning these products are likely to return less going forward.

 

Here’s what to know and how you can prepare.

Higher Money Market Fund Returns Likely Won’t Last

As the Fed rapidly hiked its policy rate starting in March 2022 to combat decades-high inflation, yields on low-risk money market funds surged to their highest levels in years, in many cases surpassing 5%, making them competitive with riskier assets like stocks.

 

However, money market yields began to decline somewhat after the Fed responded to cooling inflation with a full percentage point of rate cuts in late 2024. The U.S. central bank’s latest quarter-point reduction, delivered in mid-September 2025 amid signs of labor market weakness, lowers the policy rate to a target range of 4.00% to 4.25%. More cuts appear likely, with the Fed’s latest “dot plot” projections showing the fed funds rate declining to about 3.625% by the end of 2025 and to 3.375% in 2026.

 

That likely means returns on money market funds will fall further as well, as their yields historically have moved in tandem with the fed funds rate. Looking at just the last two rate-cutting cycles, money market yields: 

 

  • Plummeted from 4.3% in September 2007 to 0.9% by December 2008, as the Fed cut its rate more than 5 percentage points to near zero.
  • Fell from 1.8% in July 2019 to 0.7% in March 2020, as the central bank lowered the rate more than 2 percentage points, again to near zero.

What to Do With Money Market Fund Investments Now?

It may be a good time to speak with your Financial Advisor about other opportunities in the fixed income markets. For example, reallocating money from short-term cash equivalents, such as money market funds, to fixed income with longer durations may allow investors to lock in current attractive yields on assets that are still relatively low risk.

 

Keep in mind, Fed rate cuts have typically weighed less on longer-duration fixed income yields than on cash rates. Our team’s analysis shows that U.S. investment-grade bonds historically have averaged higher returns than cash equivalents during the periods between the end of Fed rate hikes and the end of Fed rate cuts—where we are currently in the cycle. Examples:

 

  • Between June 2006 and December 2008, U.S. investment-grade bonds returned 6.8% annually versus cash’s 3.7%.1,2
  • Similarly, from December 2018 to March 2020, annualized returns were 10.0% for bonds versus 2.2% for cash.1,2

 

Morgan Stanley’s Global Investment Committee has recently recommended a modest overweight in investment-grade fixed income over the “tactical” 12-month horizon. In this fixed income positioning, we prefer a duration level modestly below the benchmark Bloomberg U.S. Aggregate Index.

 

Some investors may want to consider professionally managed fixed income accounts, which offer the possible benefits of:

 

  • Active securities selection to help optimize returns and manage risk in a diverse and complex bond market.
  • “Tax-loss harvesting,” in which declining assets are sold to offset potential gains in other investments held in your taxable accounts, which may help lower your tax bill.

Keep Your Financial Goals In Mind

To be sure, cash and cash equivalents like money market funds still play important roles for investors—for example, in supporting day-to-day spending needs, savings goals and even strategic allocations in your portfolio, where such assets may act as diversifiers or risk reducers.

 

Ultimately, the amount of money market assets you hold should reflect your personal financial goals and investment strategy—not simply what the interest-rate environment might be doing at a given moment.

 

Talk to your Morgan Stanley Financial Advisor to determine the right strategy for you in the context of your goals-based plan. With Morgan Stanley’s Total Tax 365, your Financial Advisor can help you consider tax-efficient fixed income strategies that align with your financial goals and may help you reduce the impact of taxes on your investments.

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1 “U.S. investment-grade bonds” proxied by the benchmark Bloomberg US Aggregate Bond Index. “Cash equivalents” proxied by the Bloomberg 1-3 Month U.S. Treasury Bill Index.

2 Data as of September 17, 2024 

 

Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

An investment in a money market fund (MMF) is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. The price of other MMFs will fluctuate and when you sell shares they may be worth more or less than originally paid. MMFs may impose a fee upon sale or temporarily suspend sales if liquidity falls below required minimums. During suspensions, shares would not be available for purchases, withdrawals, check writing or ATM debits. 

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

IRS rules stipulate that if a security is sold by an investor at a tax loss, the tax loss will not be currently usable if the investor has acquired (or has entered into a contract or option on) the same or substantially identical securities 30 days before or after the sale that generated the loss.  This so-called “wash sale” rule is applied with respect to all of the investor’s transactions across all accounts.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

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