Cash management and investing strategies when interest rates are changing

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. ¹

For years, investors earned only modest interest from money market accounts, CDs, and U.S. Treasury bills. More recently, they benefited from elevated yields in a higher interest rate environment. Eventually, short-term securities like 3-month U.S. Treasury bills paid yields exceeding 5%. ² The Federal Reserve (Fed) dramatically increased the short-term federal funds target rate it controls over a little more than a year’s time, driving the sudden yield jump. While short-term yields 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, investors 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 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 remains in effect today. However, those investors who exited 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

Sources: U.S. Bank Asset Management Group Research, Bloomberg. *As of August 26, 2025.

“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 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. That results in an even bigger opportunity cost when leaving long-term money tied up in short-term investments.”

Will the Fed cut rates?

Investors holding significant cash positions should question where interest rates may go from here. In late 2024, the Fed cut their fed funds target rate by 1% to a range of 4.25% to 4.5%. Through August 2025, the Fed has maintained this target level, but investors expect at least another 0.50% in rate cuts starting in September. ⁴

Sources: U.S. Bank Asset Management Group Research, Bloomberg; August 1, 2024 – August 1, 2025.

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

Sources: U.S. Bank Asset Management Group Research, U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates. As of August 26, 2025.

Cautious investors who hesitate putting long-term, investable assets to work in equities or bonds may find the market unrewarding. “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).”

Hainlin advises investors in equities and fixed-income instruments to stay determined despite market volatility. “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 and maintaining 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 restore your intended allocation based on your risk tolerance, time horizon and goals,” says Haworth.

Prioritizing portfolio objectives

Haworth says it can be helpful for investors to consider how asset allocation can meet both short-term and long-term goals. “Your cash investments can meet more immediate needs but invest money for long-term objectives in assets like stocks and bonds to work toward those goals.”

For cash needs, consider separating your assets into two categories:

• Money set aside to meet current and pending cash flow needs for the next year or so.
• Money intended to meet a specific spending objective, such as a downpayment for a major purchase.

For money targeting specific spending objectives, investors could consider investments with higher yields, giving up some liquidity and price stability. Examples include money market funds, Treasury bills, and short-term bonds that may offer the potential to generate additional yield while still protecting principal.

Sources: U.S. Bank Asset Management Group, Bloomberg. As of August 26, 2025.

Consider your cash management and investing opportunities

Accurately predicting the near-term performance of equity and bond markets is challenging. However, if you have long-term financial goals, you should actively seek opportunities to invest your cash in ways that will help you achieve those objectives. While no one-size-fits-all solution exists for every investor, you can focus on strategies that align with 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.