Consider These Funds to Manage Your Cash Amid Fed Rate Cuts

The Federal Reserve began the long-awaited cuts to the federal-funds rate on Sept. 17, 2025, when it trimmed the target range by 25 basis points to 4.00%-4.25%, and two 25-basis-point cuts since then changed the range to 3.50%-3.75% as of mid-December. This may be just the beginning; the market is still anticipating at least 50 basis points of cuts over the coming 12 months, according to the CME FedWatch Tool. This key rate is a primary monetary policy lever and a benchmark for other short-term interest rates, affecting yields on money market funds and other short-term strategies.

But falling short-term yields shouldn’t lead you to chuck your short-term funds. While the yield of the three-month Treasury bill remained slightly above that of the three-year Treasury note in December 2025, history has shown that the yield curve will likely steepen, causing yields on the very front of the curve to fall more than longer yields.

Against this backdrop, investors should be thoughtful about where they park their cash and short-term investments. Effectively managing short-term liquidity by adding incremental yield where possible can add up over time. The average retail taxable government money market fund yielded less than 4% at the end of November 2025 and will likely trend lower as the Fed considers more rate cuts. With a positively sloped and steeper yield curve, investors should consider opportunities to add more value by extending into active ultrashort and short-term fixed-income funds, which can offer higher yields but come with moderate interest rate risk. Consider these general holding period guidelines for managing liquidity: a money market fund for immediate cash needs, an ultrashort fund for a period of six months to 1.5 years, and a short-term fund for 1.5 to 3.0 years. Here are some of the top investment choices to consider.

Pimco’s veteran short-term and liquidity specialists manage Pimco Short-Term PSHAX, a top-tier offering in the ultrashort bond Morningstar Category that has a Morningstar Medalist Rating of Silver. The fund relies on a flexible mandate and a deep toolkit to navigate the best opportunities on the front end of the yield curve. Its emphasis on corporate and securitized sectors, which offer incremental yield over risk-free Treasuries, helps generate an attractive yield. As of Nov. 30, 2025, the fund’s SEC yield was around 4.0%. It also comes in a more cost-effective exchange-traded fund wrapper, although it is slightly tamer than its flagship offering; Gold-rated Pimco Enhanced Short Maturity Active ETF MINT touts a 4.07% SEC yield.

Bronze-rated Vanguard Short-Term Investment-Grade VFSUX takes a slightly different approach from other more diversified funds. Its duration is longer than ultrashort offerings and therefore can be more susceptible to changes in interest rates, but less than that of intermediate funds. This fund’s 4.20% SEC yield mostly comes from its large allocations to industrial and financial corporate bonds as well as smaller stakes in Treasuries and asset-backed debt. In typical Vanguard fashion, its active bets are usually small, avoiding outsize moves in any part of the market, and its high-quality tilt aims to protect better than peers on the downside. The attractive 9-basis-point expense ratio is among the lowest in the category.

Investors who may benefit from earning tax-exempt income also have options for managing their liquidity buckets. Silver-rated Vanguard Ultra-Short-Term Tax-Exempt VWSTX produces a 2.89% SEC yield, which is higher than the average municipal money market fund’s yield. The portfolio features a diversified mix of short-dated municipal bonds across types and geographies with a focus on investment-grade-rated bonds. In addition, lead manager Stephen McFee uses both fixed-rate and floating-rate debt to manage the fund’s duration, which is typically around 1.2 years, and to easily raise cash, if needed. The fund’s 17-basis-point expense ratio ranks among the muni-national short category’s lowest.

This article first appeared in the November 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.