Lately, money market funds have been a great place to park cash temporarily. However, with the Fed easing rates, money market yields have started to trend lower. The current yield on the Schwab Value Advantage Money Market fund is 3.52%, down from 5.23% at this time last year. To put that move in perspective, here’s a brief look at money market yields over the past couple of decades.
I joined the firm in the fall of 2006, when money market yields were near their peak at around 5.25%. Even checking accounts were paying over 4%. That environment changed quickly when the Global Financial Crisis hit in fall of 2007. The Federal Reserve responded by cutting rates sharply to the 0%-.25% range. Money market yields collapsed accordingly and stayed there for roughly 7 years. This was a prolonged period of monetary policy that rewarded borrowers and punished savers.
Beginning in late 2015, as the economy strengthened, the Fed gradually began raising rates and money market yields started to rise modestly. By April of 2019, the yield on the Schwab Value Advantage Money Market fund had climbed to around 2.3%. Rates then fell briefly in 2020 amid the pandemic shock.
From 2021-2023, the Fed responded to high inflation with one of the fastest tightening cycles in decades, raising rates from near zero to above 5%. After peaking, the Fed began cutting rates in fall of 2024. There were three rate cuts in 2024 and three in 2025 leading to the gradual decline in yields we’re seeing today.
Now that we’ve summarized money market yield trends over the past 20 years, let’s take a closer look at how money market funds are invested and what ultimately drives their yields.
Money-market funds are stable because their price is always $1 a share, but their yields are anything but fixed. Money market funds are highly regulated and the short-term securities they invest in (treasury bills, government repos, commercial paper and other ultra-short-term instruments) must have a combined average maturity of 90 days or less. That short maturity is what keeps prices stable but also means yields reset constantly.
The Fed Funds rate is the anchor of the U.S monetary policy. This is the interest rate at which banks lend balances to other depository institutions overnight. The Fed sets the Fed Funds target range and uses it to influence economic activity. When the Fed raises rates, money market funds rise and when it cuts rates, they fall. There’s no locking in today’s yields for the future. Money market fund yields typically move in small steps and lag the first Fed funds rate change slightly. Historically, once the Fed is in a cutting cycle, cash yields tend to stay low. In other words, they don’t recover until there is an economic need to raise rates again.
So what does the downward trend in money market yields mean for investors? Money market funds are excellent for emergency reserves and near-term spending. They are not designed to preserve long-term purchasing power, generate durable income or serve as a long-term portfolio investment. It’s important to remember that cash is a tool, not an investment strategy.
