The Fabulous Yields, and Lurking Risks, of Money Market Funds (Published 2023) (2024)

The markets have been rocky ever since the Federal Reserve started raising interest rates to combat inflation last year.

Stocks and bonds have lost money. The costs of financing a car, a house or even a small credit-card purchase have risen. Two important regional U.S. banks failed and needed bailouts, and worries about a possible recession have spread.

But it’s been a glorious time for one part of the financial world: money market mutual funds. The biggest money funds tracked by Crane Data are paying more than 4.6 percent interest, and a handful have yields around 5 percent.

Their gaudy interest rates closely follow the Fed funds rate, set by the central bank. The effective Fed funds rate is now about 4.83 percent. That’s onerous for people who need to borrow money, and deliberately so: The Fed is raising rates because it is trying to squelch inflation by slowing the economy.

What’s painful for borrowers is great for people who need a place to park money they have put aside to pay the bills. In a bid to hold onto customers, some banks have begun raising rates in savings accounts and for certificates of deposit, though most bank deposits remain in accounts that pay close to nothing.

That’s given money market funds magnetic appeal. Their assets have swollen to more than $5.6 trillion, from $5.2 trillion in December 2021, when the Fed began talking about impending interest rate increases. Money market funds are likely to keep growing if the Fed holds rates at their current level, or raises them further.