Rising interest rates have wreaked havoc this year in financial markets.
Yet they are an unambiguous boon in one unheralded arena: money market funds, where the higher rates almost immediately funnel more money to investors without major complications.
This is a big exception to the other major effects of rising rates, which have made plenty of negative headlines because they are a drag on the economy, a burden for people seeking mortgages and a punishing hurdle for stocks. In the bond market, rising rates are a complicated, head-spinning fact of life, setting off widespread losses, though they also promise better returns in the years ahead, as I noted last week.
In comparison, money market funds are blessedly simple. If you’re holding cash in them or are thinking of doing so, higher interest rates are something to celebrate right now.
That’s because money market funds closely follow short-term rate shifts by the Federal Reserve. On Sept. 16, the Federal Reserve raised its short-term policy rate, the Fed funds rate, one quarter of a percentage point, to a range of 3.75 to 4 percent. Money market rates began moving higher almost immediately.
That said, they didn’t jump a quarter point overnight, as the Fed funds rate did. Money market funds are invested in short-term securities like Treasury bills, and it now takes about 36 days for all of these holdings to mature and be completely replaced with higher-yielding investments, according to Crane Data, an independent financial market research firm.
So while money market rates started moving upward soon after the last Fed rate increase, they have continued to edge gradually higher this week. The average interest rate for the 100 biggest money market funds tracked by Crane Data now stands at 3.71 percent. It was 3.51 percent at the end of August.
“If things go the way the markets expect, money market fund rates will reach 4 percent by the end of the year, and they will keep rising from there,” said Peter G. Crane, the firm’s president and a longtime expert on money market funds.
Following the Fed
The markets assume that the Fed will raise short-term rates once more this year — but probably not at its meeting next week, which comes shortly before the midterm elections.
Inflation is likely to stay well above the Fed’s 2 percent target, according to estimates from futures traders, who expect the central bank to keep raising the Fed funds rate to a range of 4.50 to 4.75 percent by the middle of 2027.
If that turns out to be true, average money market rates can be expected to rise to somewhere close to 4.5 percent.
Rising short-term interest rates would probably count as more bad news for the economy, for multiple financial markets and for the great majority of consumers. But higher rates would only make the income stream from money market funds more appealing.
Globally, money market funds held $13.5 trillion at the end of March, according to the Investment Company Institute, the mutual fund trade group. They already have more than $8.4 trillion in assets in the United States alone, up from about $5.4 trillion five years earlier, Mr. Crane said. And as long as the economy keeps expanding and short-term rates remain above roughly 3 percent, the funds seem likely to keep growing.
Safety Considerations
U.S. money market funds aren’t insured by the government, as bank deposits are. If you prefer that greater degree of safety, by all means, keep your money in bank certificates of deposit or in high-yield savings accounts, where interest rates are rising, too. These various bank deposits are insured by the Federal Deposit Insurance Corporation.
As a consequence of previous financial crises, including a big one in 2007 to 2009, the rules governing money market funds have gotten stricter. Most money market funds for individual investors now hold government securities — mainly Treasury bills, which are backed by the U.S. government — instead of commercial securities, which are deemed to be riskier and are held by so-called prime funds.
I view big government money market funds run by large financial institutions as quite safe and keep most of my cash in them.
Money market funds are a form of mutual fund. As with stock and bond mutual funds, fees matter. Assuming the funds are invested in essentially the same underlying securities, lower fees mean higher returns, so check fund fees closely.
Vanguard, the low-cost leader in the mutual fund business, offers money market funds with fees ranging from 0.07 percent to 0.12 percent, a level that serves as a reasonable point of comparison, if you are shopping around. (Because my workplace retirement accounts are run by Vanguard, and Vanguard fees are low, the convenience of sticking with one place has led me to use Vanguard for money market funds, too. But your own situation may dictate other choices.)
A Solid Third Place
We’re not talking about making great fortunes here. Money market funds don’t do that. They generate modest returns.
At the current average 3.71 percent rate for large money market funds, for every $10,000 held for one year, you would receive $371. That’s no bonanza. (Vanguard’s Federal Money Market Fund’s yield is a little better, 3.84 percent on Thursday, generating $384 for one year, at that rate.)
It’s better than the nearly nothing you would receive in a standard checking account. But in comparison with a hot stock, the returns from a money market fund are so small, they are barely visible.
Here’s a quick comparison of what you would have received, including reinvested dividends and interest, through Thursday for this year and over five years, for Nvidia, the S&P 500 stock index and the Vanguard Federal Money Market Fund. The data comes from FactSet:
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Nvidia this year: 12.6 percent. Over five years: 56 percent, annualized.
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S&P 500 this year: 14.1 percent. Over five years: 12.8 percent, annualized.
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The Vanguard Federal Money Market fund this year: 3 percent. Over five years: 3.8 percent, annualized.
The money market fund looks a lot better when you stack it up against an investment-grade bond fund, however:
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The iShares Core U.S. Aggregate Bond E.T.F. this year: a loss of 0.8 percent. Over five years: a loss of 0.1 percent, annualized.
The dismal bond returns occurred because rates soared this year, and bond prices and interest rates (or yields) move in opposite directions. The securities held by money market funds have such a short duration that the negative price effect of rising yields is barely discernible — and it is immediately outweighed by the income from higher yields.
Over longer periods, though, the situation is different. Longer-term bonds tend to outperform money market funds precisely because bonds carry higher yields as compensation for the risk of holding them for longer periods. That’s why it makes sense to hold bonds and bond funds for long-haul stability, and to use money market funds as a place to keep cash for paying the bills and emergencies.
The inferiority of money market funds as long-term investments is clear when you look at historical returns. Here are some comparisons with stocks and bonds, including interest and dividends, from 1928 to 2025, collected by Aswath Damodaran, a New York University finance professor, and posted on his website:
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The S&P 500 stock index and its predecessors: 10 percent, annualized.
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10-year Treasury notes: 4.8 percent.
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Three-month Treasury bills, a rough proxy for money market returns: 3.4 percent.
There’s no getting around it. Money market funds won’t make you rich.
But in a time of rising interest rates, they are a convenient and immediately rewarding place to keep cash. When the news is bad, money market funds make me calmer. That’s no small thing in 2026.
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