The Quiet Revolution in Cash Management: How Americans Are Harnessing Money Market Funds and CDs to Outpace Inflation

In 2025, a subtle but profound shift is reshaping how Americans manage their cash. As the Federal Reserve's elevated interest rates persist and inflation remains stubbornly above 2%, savers are increasingly reallocating funds from traditional bank accounts—where yields hover near 0.10%—to higher-yield alternatives. Money market funds and CDs, long overlooked as mere parking lots for cash, are now emerging as strategic tools for preserving purchasing power and building long-term savings resilience.

The Drivers of the Shift

The Federal Reserve's rate hikes since 2022 have created a stark contrast between the returns on traditional savings accounts and the yields available in short-term instruments. For example, money market funds now offer average returns of 3.5% in 2025, while CDs with terms of one to five years are yielding up to 5.00% annual percentage yield (APY). These rates far outpace the 2.7% year-to-date inflation rate as of July 2025, ensuring that savers can maintain real returns even in a high-inflation environment.

The JPMorgan Chase Institute's data underscores this trend: households earning less than $35,000 annually have seen their cash balances grow at 5% to 6% annually by shifting to higher-yield vehicles. This shift is not limited to high-net-worth individuals; it reflects a broader awakening to the power of compounding and the risks of letting cash erode in low-yield accounts.

Money Market Funds: Flexibility Meets Yield

Money market funds (MMFs) have become a cornerstone of modern cash management. Unlike traditional savings accounts, MMFs offer liquidity and competitive yields while maintaining safety through diversified portfolios of short-term instruments, including Treasury securities and commercial paper. BlackRock's recent launch of the iShares Government Money Market ETF (GMMF) and iShares Prime Money Market ETF (PMMF), both charging 0.20% fees, exemplifies the innovation driving this space. PMMF, which includes commercial paper, currently offers higher yields than GMMF, reflecting the growing appetite for incremental returns without sacrificing security.

For investors, MMFs provide a unique balance: they avoid the volatility of equities while outperforming traditional savings accounts. The Dimensional Short-Duration Fixed Income ETF (DFSD) and PIMCO Enhanced Short Maturity Active ETF (MINT) have attracted $2 billion in inflows, demonstrating demand for actively managed short-duration strategies that enhance yields without compromising safety.

CDs: A Time-Tested Hedge Against Inflation

Certificates of deposit (CDs) remain a stalwart for savers seeking guaranteed returns. With the Fed's rate cuts expected in September 2025, locking in current CD rates of 4% to 5% APY offers a compelling opportunity to outpace inflation. For instance, a five-year CD at 4.50% APY would generate a real return of approximately 2.2% after accounting for 2.7% inflation, preserving capital while generating income.

The appeal of CDs lies in their simplicity and FDIC insurance (up to $250,000 per institution). However, investors must navigate the trade-off between yield and liquidity. Short-term CDs (one to two years) offer flexibility to reinvest at higher rates as the Fed's policy evolves, while longer-term CDs provide stability in a rising rate environment. A CD ladder—spreading funds across multiple terms—can mitigate the risk of rate cuts while ensuring a steady stream of returns.

Underappreciated Opportunities in the Ecosystem

Beyond traditional MMFs and CDs, innovative products are expanding the toolkit for cash management. Floating-rate instruments like collateralized loan obligations (CLOs) and the WisdomTree Floating Rate Treasury Fund (USFR) offer yields that adjust with interest rates, reducing reinvestment risk. Similarly, ETFs like the FolioBeyond Enhanced Fixed Income Premium ETF (FIXP) and NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI) leverage options strategies to generate alpha without increasing volatility.

These products cater to savers seeking to optimize returns while maintaining downside protection. For example, the CLO ETF with $20 billion in assets provides exposure to high-yield corporate debt with floating rates, aligning with the Fed's rate trajectory. Meanwhile, the USFR's focus on Treasury securities ensures safety while capturing incremental yield through duration management.

Strategic Recommendations for Savers

1. Diversify Across Vehicles: Allocate cash across MMFs, CDs, and short-duration ETFs to balance liquidity, yield, and risk. For instance, 50% in MMFs for flexibility, 30% in a CD ladder for stability, and 20% in actively managed ETFs for enhanced returns.
2. Leverage FDIC Insurance: Prioritize CDs from banks with FDIC coverage to protect principal, especially in a volatile rate environment.
3. Monitor Rate Cycles: Reinvest maturing CDs and MMF holdings as the Fed's policy evolves. A CD ladder ensures exposure to rising rates without locking up all funds.
4. Embrace Innovation: Consider floating-rate products and ETFs that adjust with interest rates, reducing the risk of rate cuts eroding returns.

Conclusion

The reallocation of cash from traditional accounts to higher-yield alternatives is not a fleeting trend but a structural shift in how Americans approach savings. Money market funds and CDs, once seen as passive tools, are now central to a proactive strategy for outpacing inflation and building long-term resilience. As the Fed's rate trajectory remains uncertain, savers who act decisively today can secure returns that outperform inflation while maintaining the safety and liquidity their portfolios demand.

In this evolving landscape, the key lies in balancing innovation with prudence—harnessing the best of both worlds to turn cash into a dynamic, inflation-beating asset.