Cash management and investing strategies when interest rates are changing

Higher interest rates and choppy markets have encouraged many investors to park sizeable balances in cash-equivalent investments and short-term instruments. The Investment Company Institute reports total money market fund assets have surpassed $7.7 trillion, underscoring how widespread this preference has become. ¹ While these vehicles typically limited price volatility, they can fall short of long-term goals when investors leave too much of their portfolio on the sidelines.

For years, money market accounts, CDs, and U.S. Treasury bills offered modest yields that rarely felt compelling. That changed as interest rates rose, with 3-month U.S. Treasury bills yields exceeding 5% in 2024 before recently settling below 3.75%. ² The Federal Reserve (Fed) drove much of this shift through aggressive rate hikes in 2022 and 2023, and later through rate cuts in 2024 and 2025 that reduced short-term yields from their peaks. Even as those yields have eased, cash still looks attractive – so investors increasingly ask how much cash is “enough” without sacrificing long-term opportunity.

Choosing short-term safety over long-term potential

When markets swing, many investors raise cash to reduce the share of assets exposed to price risk. In 2022, the Fed raised rates to slow the economy and curb inflation, and the S&P 500 Index fell 25% in ten months, reinforcing the instinct to step back from stocks. ³ Investors often make this shift to feel more secure, especially when headlines intensify uncertainty. Yet the decision becomes more complicated when “safety” also limits participation in the recovery.

That tradeoff showed up clearly as markets rebounded, because investors who moved out of stocks and stayed in cash missed substantial wealth accumulation in 2023, 2024 and 2025. Over that period,  the S&P 500 delivered total returns above 17% each year, which cash-like holdings couldn’t match. ³ “While people became comfortable with higher savings yields, over time, they’ll find they are likely better off diversifying into long-term assets such as investment-grade bonds and equities,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. If your plan spans years – not months – diversification often matters more than the comfort of a short-term yield.

What does today’s Federal Reserve policy mean for investors in cash equivalents?

Haworth encourages investors with significant cash positions to focus on where interest rates may go next, not just where they have been. “Investors should be aware that as the Fed lowers interest rates, yields on cash-equivalent instruments fall. That results in an even bigger opportunity cost when leaving long-term money tied up in short-term investments.” The Fed cut its fed funds target rate by 1% in late 2024, followed by three 0.25% cuts in 2025, with two additional 0.25% cuts expected in 2026. ⁴ As policy rates come down, cash yields typically follow – so investors may need a more intentional plan for cash rather than relying on yesterday’s peak yields.

3-month Treasury yields tend to be most directly impacted by Fed interest rate policy. Three-month yields generally trended lower since mid-2024, ² although yields recently moved modestly higher in the wake of Fed pronouncements reflecting more caution about future interest rate cuts.

Cash still plays an important role, especially for near-term spending needs or as a volatility buffer. However, investors who keep long-term, investable assets in cash for too long can unintentionally let short-term convenience override long term progress. “Investors earn returns from taking on uncertainty or risk,” says Tom Hainlin, national investment strategist with U.S. Bank Asset Management Group. “While short-term returns are not guaranteed, markets typically reward long-term patient investors for lending money to a business or government entity (bonds) or participating in a corporation’s future growth (equities).”

Putting cash to work without losing control

Rather than trying to “time” the market, Hainlin advises disciplined investing aligned with your plan, even when uncertainty feels loud. “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 investing in alignment with your financial plan.” This approach helps investors avoid reactive moves that can lock in missed opportunities when markets recover.

At the same time, disciplined investing does not mean ignoring change, because portfolios drift as markets move. “It’s important to regularly rebalance a portfolio to reflect how market performance has changed your asset mix and restore your intended allocation based on your risk tolerance, time horizon and goals,” says Haworth. Rebalancing can turn volatility into a process decision – brining your allocation back in line – rather than an emotional decision driven by the latest market swing. When you treat rebalancing as maintenance, you reinforce the long-term structure your plan depends on.

Bucket cash by purpose to improve outcomes

A practical way to manage cash is to separate it by timeframe and intent, so each dollar has a job. First, set aside money to meet current and pending cash flow needs for the next year or so, because liquidity matters most when bills or planned expenses are close. Second, earmark money intended to meet a specific spending objective, such as a downpayment for a major purchase, so you can match the investment approach to the timing and importance of the goal. This two-bucket mindset can help investors reduce excess “just in case” cash while preserving the confidence to invest for the long term.

For goal-based cash that does not need to sit fully liquid, investors can consider options that offer higher yields while accepting modest tradeoffs in liquidity and price stability. Examples include money market funds, Treasury bills, and short-term bonds that generate additional yield while still focusing on principal protection.

Even then, the core decision stays the same: align cash holdings with near-term needs, and invest long-term dollars to support long-term objectives. 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.