A mountain of money

Our latest Charted Market Insights report highlighted the sheer size of cash on the sidelines — ICI data shows $7.3 trillion in total net assets across all money market funds. We view these elevated cash levels through a contrarian bullish lens: abundant liquidity provides fuel for risk assets if investors decide to redeploy capital.

Money market fund (MMF) yields are closely linked to the Fed Funds Rate. With the Fed likely to cut rates on Wednesday, MMF yields should move lower, making them less competitive relative to other investments. This shift could push investors to rotate cash into longer-duration or riskier assets such as equities or corporate bonds, particularly if confidence builds around stronger markets ahead.

Historically, Fed rate cuts tend to encourage risk-taking, but the story is not one-dimensional. If markets begin to price in a deeper slowdown or recession — or if confidence in the Fed falters — risk appetite could fade. In such a scenario, MMF assets may remain elevated despite lower yields, as investors continue to value liquidity and safety during uncertain times.

The chart below shows...

• 2007-2009 (Global Financial Crisis - GFC): Aggressive Fed cuts into the Great Recession. Money market fund yields dropped, but money market assets rose as investors sought safety.

• 2009-2015: Money market funds assets dropped as the Fed kept rates low following the GFC. Low interest rates encouraged risk taking into longer-duration assets.

• 2015-2019: Money market fund assets rose along with the effective Fed Funds rate into mid 2019 as higher interest rates made money market funds more attractive.

• 2020-2022: Fed cut rates during the COVID-19 pandemic and kept them low until hiking more aggressively starting in early 2022. Investors sought safety, keeping money market fund assets elevated during a period of low interest rates.

• 2022-2025: Money market funds have marched on to record high after record high after interest rates rose from their COVID-19 pandemic lows. We view this as "The Great Normalization" of interest rates from aggressively low levels seen in the early 2020s and from late 2008 into late 2015.

Chart 1: Money market funds, effective Fed Funds rate, and NBER recessions

Source: Optuma, Investment Company Institute, Federal Reserve Bank of St. Louis