How Money Market Fund Yields Track the Fed Funds Rate
Quick take: Money market fund yields track the federal funds rate with near-perfect correlation, lagging by 1-4 weeks (the length of the fund's weighted average maturity). When the Fed cuts, MMF yields fall within a month. This is the single most important fact to understand about MMFs, and the reason MYGAs lock today's rate while MMFs do not.
| Item | Rate | Source, as of |
|---|---|---|
| Fed funds target range | 3.75-4.00% (+0.25 on 9/16/2026) | federalreserve.gov, 9/25/2026 |
| Previous range | 3.50-3.75% (set December 2025) | federalreserve.gov |
| Vanguard Treasury MMF (VUSXX) 7-day | 3.76% | vanguard.com, 09/24/2026 |
| Schwab Prime Advantage (SWVXX) 7-day | 3.70% | schwabassetmanagement.com, 09/25/2026 |
| Schwab Government (SNVXX) 7-day | 3.57% | schwabassetmanagement.com, 09/25/2026 |
| Fidelity Government MMF (SPAXX) 7-day | 3.46% | fidelity.com, 09/24/2026 |
Money market fund vs MYGA, after tax
What $100,000 earns in 5 years: money market fund vs MYGA, after tax
Rates used: Money market fund 3.76%, the highest 7-day yield we tracked (VUSXX, fund sites, September 23, 2026); yields change daily; change it to the rate you are offered. MYGA 5.95%, the best A-rated rate we track as of October 13, 2026: Delaware Life Pinnacle Plus 5-year (AM Best A-, negative outlook, 7/31/2026), $100,000 and up, effective October 6, 2026 (Delaware Life rate sheet).
| Money market fund, interest taxed every year | $115,550 |
|---|---|
| MYGA, tax-deferred, before tax | $133,507 |
| MYGA after paying tax on all the interest at withdrawal | $126,136 |
| Tax deferral alone adds about | $674 |
| MYGA ahead of the money market fund, after tax | $10,586 |
Assumes 22% federal and 0% state income tax, no withdrawals, rates held for the whole term. MYGA interest is taxed as ordinary income when you withdraw it, not as capital gains. Gains taken before age 59 1/2 can owe a 10% IRS penalty, and cashing out early can cost a surrender charge. In an IRA both grow tax-deferred, so the edge there is the rate alone. A MYGA is backed by the issuing insurer's claims-paying ability and your state's guaranty association up to its limits, not the FDIC. General education, not tax, legal or financial advice.
The mechanics, why correlation is essentially 1.00
A money market fund holds short-term debt: T-bills, agency paper, commercial paper, repo. Every piece of paper matures within days, weeks, or at most a few months. When the paper matures, the fund reinvests the proceeds in new paper, at the new prevailing market rate.
Short-term market rates are anchored to the federal funds rate. The repo market trades within a few basis points of the Fed's target. T-bill yields trade within ~10-20 bps of the Fed funds rate. Commercial paper trades 10-30 bps above the Fed funds rate.
So when the Fed cuts 25 bps, every piece of paper the MMF reinvests in over the next 2-4 weeks gets reinvested at a yield 25 bps lower. Within one weighted-average-maturity cycle (typically 20-45 days), the entire portfolio has repriced. The 7-day SEC yield drops nearly 25 bps.
Rates expire like milk.
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Historical evidence, the 2020 case
| Date | Fed Funds Target | Government MMF 7-Day Yield (approx) |
|---|---|---|
| Feb 2020 | 1.50-1.75% | ~1.45% |
| March 3, 2020 (Fed cuts 50 bps) | 1.00-1.25% | ~1.10% (within 2 weeks) |
| March 15, 2020 (Fed cuts 100 bps) | 0.00-0.25% | ~0.15% (within 2 weeks) |
| July 2020 | 0.00-0.25% | ~0.02% (after expense drag) |
| December 2020 | 0.00-0.25% | ~0.01% |
In four months, government MMF yields fell from ~1.45% to ~0.02%, a 99% reduction in yield. Anyone holding MMFs for income was earning essentially nothing for the next 24 months until the Fed started hiking in March 2022.
Historical evidence, the 2022-2024 hiking cycle
| Date | Fed Funds Target | Government MMF 7-Day Yield (approx) |
|---|---|---|
| February 2022 | 0.00-0.25% | ~0.02% |
| July 2022 | 2.25-2.50% | ~1.65% |
| December 2022 | 4.25-4.50% | ~3.85% |
| July 2023 | 5.25-5.50% | ~4.95% |
| 2024 (steady) | 5.25-5.50% | ~5.05% |
The hiking cycle moved MMF yields from near-zero to over 5% in 18 months, very close to the Fed funds rate the entire way.
Where the Fed stands now (September 2026)
The Fed cut three times in late 2024 (to 4.25-4.50% in December 2024) and three more times in late 2025 (to 3.50-3.75% in December 2025). On September 16, 2026 the FOMC reversed course and raised the target range 25 bps to 3.75-4.00%, its first move of 2026.
Money market yields sit just under that range, as the mechanics above predict: on September 23-25, 2026 major funds showed 7-day yields of 3.45-3.76% (SPAXX 3.46%, SNVXX 3.57%, SWVXX 3.70%, VUSXX 3.76%). If the Fed holds, those yields should drift up over the next few weeks as the portfolios roll into post-hike paper. Nobody knows the next move; a locked rate protects you only if short rates fall.
Why MYGAs lock and MMFs float
A MYGA is an insurance contract, not a portfolio. The carrier takes your premium, invests it in a long-duration portfolio (typically 5-10 year corporate bonds and structured credit), and guarantees you a rate based on the yield that portfolio was earning at the time of contract. Once the contract is issued, the rate is locked, the carrier bears the reinvestment risk for the next 3-10 years.
An MMF is the opposite. The MMF's portfolio matures and rolls every 20-45 days. The MMF has no ability to lock a rate, its yield is structurally a passthrough of whatever the short-term market is paying today.
This is not a defect of either product. It's a design choice. The MMF gives you full liquidity (because the portfolio is short-maturity). The MYGA gives you rate certainty (because the portfolio is long-duration). You can have one or the other; not both.
How to use this knowledge
- Cash you might need within 6 months: Use a MMF. Liquidity matters more than rate lock.
- Cash you reliably won't need for 3+ years: Lock a CD or MYGA. The MMF will likely lose 100+ bps of yield over the holding period vs the locked rate.
- Cash you won't need for 1-3 years: Personal judgment. CD or short MYGA gives you the lock; MMF gives you flexibility. Lean toward locking when you expect the Fed to cut.
More Money Market Fund research
- Best Money Market Funds 2026 (ranked)
- MMF vs MYGA, when each wins
- MMF vs HYSA, yield spread and risk
- MMF vs CD, liquidity vs lock
- Breaking the buck, 1994 & 2008 cases
- How MMF yields track the Fed funds rate
- High-Yield Savings reviews
- Best MYGA rates 2026
FAQ
Q: How fast does MMF yield drop after a Fed cut?
A: Roughly within 2-4 weeks. The fund's weighted average maturity (WAM) determines the speed, a 30-day WAM fund has fully repriced within one month.
Q: Could MMF yields stay above 4% even if the Fed cuts?
A: Only if the Fed itself stays above 4%. MMF yield is fundamentally a passthrough of the Fed funds rate. If the Fed cuts to 3%, MMF yields will be near 3%.
Q: Why is the correlation not exactly 1.00?
A: Expense ratios eat ~10-50 bps of gross yield (so net yield is below the Fed funds rate). Repo rates can drift a few bps from the Fed funds target. Commercial paper trades at a small spread above. The aggregate effect is a 95-99% correlation, not literally 100%, but for practical purposes the MMF yield is the Fed funds rate minus expenses.
Q: Should I sell MMF now and lock a MYGA?
A: For money you reliably won't need for 3+ years, the answer is usually yes when the Fed is cutting. Run the numbers for your specific case, see the MMF vs MYGA worked math →
About Hans Goldstein: Independent retirement income specialist. CA Life License #4273294. NPN #20602398. Reviews 30+ carriers and the full menu of cash alternatives. Phone: 213-414-2808. Email: hans@hansgoldstein.com.
Hans is independently licensed as an insurance producer; he does not sell money market funds or other securities. These reviews are based on publicly available fund prospectuses, fact sheets, SEC filings, and SEC-yield reporting requirements.
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Money market funds are great for short-term cash. For money you don't need for 3+ years, a multi-year guaranteed annuity (MYGA) typically pays 100-150 bps more and defers tax. Get an independent side-by-side before you let cash drift in a MMF for 5 years.
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Disclosure
This review reflects publicly available fund prospectuses, fact sheets, and approximate 7-day SEC yields as of the date stated above. Money market fund yields change daily and reset roughly in line with the federal funds rate; always confirm current yield, expense ratio, holdings, and weighted average maturity against the most recent fund disclosure document before committing capital. Money market funds are not FDIC-insured. Government and Treasury money market funds historically maintain a stable $1.00 NAV but are not guaranteed to do so, see "breaking the buck" history. Prime money market funds may impose liquidity fees or redemption gates during market stress. This is general education, not a personal recommendation or an offer of any product. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) and does not sell securities or money market funds; comparisons to multi-year guaranteed annuities (MYGAs) are provided for informational context only. No compensation has been received from any fund company in connection with the publication of this review. Always read the actual fund prospectus and consult a licensed advisor before investing. Past yield does not predict future yield. State income tax treatment of U.S. Treasury obligations varies and is subject to change. Tax discussion reflects federal and California law as of 2026 and is subject to change.