The consensus reading on money market fund yields is that they remain a sensible parking spot for cautious capital. The numbers underneath that reading are rather less comfortable than the narrative allows.
Household balances in money market funds (MMFs) rose by $63 billion from the prior quarter and year-over-year by $579 billion, or 12.8%, to $5.1 trillion in Q2, according to the Federal Reserve‘s quarterly Z1 Financial Accounts. Since Q1 2022, when the Fed began raising its policy rates, those balances have more than doubled. The figure covers both retail MMFs held directly through brokers or banks and institutional MMFs accessed indirectly through employers, trustees, and fiduciaries, including 401(k) plans.
Total MMF balances, including those held by institutional investors, rose by $152 billion in the quarter and year-over-year by $960 billion, or 12.8%, to $8.4 trillion. That is a lot of capital chasing safety. The question the inflow figure does not answer is whether safety is actually being bought, or merely the illusion of it.
When Money Market Fund Yields Fall Short of Inflation
MMF yields are currently below 3.75% after fees. That compares unfavourably with the Consumer Price Index, which pegged inflation at 3.4% year-over-year in August, and with the Fed’s preferred PCE price index, which put inflation at 3.7% year-over-year in July. The arithmetic is blunt: in real terms, money market fund yields are meagre to negative. Households are piling into instruments that are, at this moment, quietly eroding their purchasing power.
Treasury bills offer a marginally better picture, and without the fees. A six-month T-bill sold at auction at an investment rate of 4.20%, with the secondary market yield at 4.18%. The three-month equivalent came in at an investment rate of 4.07%, trading at 4.04% in the secondary market. T-bills bought at auction and set on automatic rollover are a close MMF alternative, generally without management fees, which means their effective yield competes better against inflation. Still, the margin over the PCE reading is thin enough to be unreliable.
The rate trajectory matters here, and it does not flatter the bull case for cash. CNBC reported that the FOMC’s so-called dot plot showed 19 members, voters and non-voters combined, projecting the benchmark fed funds rate at 4.4% by the end of 2024. More consequentially, the Fed’s own forecasts point to rates landing at 3.4% through 2025, implying a further full percentage point in cuts from that level. If that trajectory holds, MMF yields will follow the fed funds rate lower, compressing the already-thin real return further.
The bond market had been pricing in a rate hike at the next FOMC meeting. Yet at the July FOMC meeting, only three of twelve voting members backed a hike, and none was delivered. The pattern is worth noting: market pricing has overestimated the hawkishness of the committee before.
Certificates of Deposit: Record Balances, Slowing Momentum
Large time-deposits at banks, defined as certificates of deposit (CDs) of $100,000 or more, rose by $160 billion year-over-year to a record $2.56 trillion in August, per the Federal Reserve’s monthly H.8 report on bank balance sheets. That figure includes CDs held by MMFs themselves. Since March 2022, large CD balances have nearly doubled. The FDIC insures CDs up to $250,000, which makes the government-backing argument for this segment at least partially valid.
The growth story has texture, though. Starting in September 2024, the pace slowed as banks trimmed CD rates in response to Fed cuts, before re-accelerating this year on slightly higher rates. Small time-deposits, CDs of under $100,000, tell a more cautionary tale. After peaking in September 2024, balances have dropped by $128 billion and have been essentially flat at around $1.5 trillion for seven months, per the Fed’s H.6 data on money stock. Savers in smaller CDs have already felt the drag of the rate-cutting cycle.
Many CDs are currently being offered at 4% and above. That is a more credible real yield than an MMF at sub-3.75% after fees, though only marginally so, and only if inflation cooperates by decelerating toward those levels.
The broader point, which the inflow data tends to obscure, is that low-risk instruments are not inflation-proof. Housing, the asset most households regard as their inflation hedge, saw the national median single-family home price rise just 3.3% from mid-2022 through August 2026 against CPI growth of 13.3% over the same period: a meaningful loss of real value. Stocks carry a different risk profile but have historically delivered real returns, at the cost of drawdowns that can run deep and long. The Nasdaq did not recover its inflation-adjusted March 2000 high until two decades later. The consolation for MMF and CD holders is capital preservation in nominal terms. Whether that nominal preservation holds in real terms over the next two years depends heavily on where the Fed’s dot plot ends up relative to where inflation settles.
