Managing Business Cash with a Neutral Fed Funds Rate

In December 2025, the Federal Open Market Committee [FOMC] lowered the Fed Funds Rate to a target range of 3.50 – 3.75%, the lowest policy rate in nearly three years. Federal Reserve Chairman Jerome Powell began to use the term “neutral stance” to describe the policy rate, and this term hadn’t been heard for quite a while.

For cash managers, the reduction marked the end of an era of restrictive, high-interest-rate policy and the beginning of a more balanced economy. However, a “neutral” Fed stance doesn’t mean cash management strategies should be static. Instead, a neutral policy rate requires cash managers to adapt their strategy to balance liquidity and yield while maintaining purchasing power.

What is a “Neutral” Policy Stance?

For the Fed, a neutral stance most commonly refers to an interest rate level that is intended to neither restrict nor accommodate economic growth. It’s the “Goldilocks” of monetary policy – a middle ground between fighting inflation and preventing recession.

A neutral position allows the Fed to pivot as the economy changes. If the economy falters, the Fed can cut rates to provide a helping hand. If the economy begins to overheat, the Fed can hike rates to restrict growth.

The Fed generally moves to a neutral stance when economic growth is stable and the risks to employment and inflation are roughly in balance. This situation has historically required a nuanced approach to cash management.

Re-Evaluating the Balance Between Liquidity and Yield

When the Fed Funds Rate is restrictive, cash management is straightforward. Liquid accounts and short-term investments have high yields, and the yield curve may even invert. In this case, cash is king because companies can earn a competitive rate of return while staying liquid.

However, the dynamic shifts when the Fed pivots to a neutral stance. In this case, the yields on liquid and short-term investments typically fall, and the yield curve generally reflects a normal shape, so while liquid and short-term investments remain a safe place to store cash, their returns may no longer keep pace with inflation.

Consequently, cash managers must re-evaluate the relationship between liquidity and yield in their portfolio. The first steps in this process should be to categorize cash reserves and diversify the investments that hold them.

The Three-Bucket Strategy for Business Cash Management

To thrive when the Fed has taken a neutral stance, some cash managers use a “bucket” approach. This involves segmenting cash based on the projected date it will be needed and choosing investments tailored to each timeframe. Three common buckets are operating cash, medium-term reserves, and surplus reserves.

Operating Cash

Cash needed for short-term obligations like payroll, rent, and vendor payments is operating cash. These funds are generally needed within 30 days, and the main goals when investing them are safety and accessibility. Even if the yield in a liquid account is lower than other options, the cost of not having operating cash available when needed is higher than any lost interest.

Medium-Term Reserves

The middle ground of cash reserves includes funds that aren’t needed for immediate expenses, but they are set aside for a specific purpose within a predictable timeframe. Often, cash managers put funds that are needed within the year in this bucket, but that timeframe is variable depending on the business and its planned projects.

Common examples of medium-term reserves are funds set aside to pay the current year’s taxes, funds needed to purchase equipment later in the year, and funds set aside to create stability during a typically slow season. These reserves need to be accessible on a specific date in the future, so short-term Certificates of Deposit [CDs] or Treasuries are common investment choices. Both of those investments generally offer a higher rate of return than a liquid account while maintaining a predictable maturity date.

Surplus Reserves

Cash that isn’t needed in the near future or has no specific purpose at the current time are surplus reserves. These funds could be earmarked for a future acquisition or product line that doesn’t have a concrete schedule yet, or they could be a “rainy day” fund that acts as an emergency reserve for the business.

Long-term CDs or Treasuries are often preferred choices for surplus reserves when the yield curve is normal. In this case, long-term investments have higher yields than short-term alternatives, so the business can use these higher yields to supplement their overall rate of return.

By splitting cash into these three metaphorical buckets, a business can invest each dollar of reserves to yield the highest rate of return possible given its required liquidity. To further optimize these returns, consider applying a more advanced investing strategy to each bucket.

Using CD Ladders for Enhanced Flexibility

While a neutral stance is the preferred situation for the Fed, it’s unlikely to be a permanent destination. In reality, it’s more of a holding pattern, and the Fed could rapidly pivot in either direction as the economy changes.

Businesses also need a cash management strategy that allows them to react quickly. That’s where a CD ladder becomes an invaluable tool. A CD ladder involves splitting cash into multiple CDs with staggered maturity dates.

For example, a business with $1 million needed in 12 months could buy a single 12-month CD or 4 CDs maturing every 90 days. Each time a CD matures, the business has the option to reinvest in another CD or change the strategy for that cash. A continuous CD ladder has multiple long-term CDs maturing at regular intervals, such as every year.

CD ladders provide 2 strategic benefits for business cash:

1. Consistent Liquidity. By staggering maturities, a portion of the cash becomes available at regular intervals. This provides predictable liquidity if the business needs cash and doesn’t want to incur early withdrawal penalties.
2. The Ability to Pivot. If the Fed raises rates, the business has CDs maturing soon that can be reinvested at higher rates. If the Fed lowers rates, the business has cash “locked in” at the previous high rates.

A CD ladder isn’t right for every business or situation, but this strategy can be extremely effective for companies that need predictable liquidity, combined with a reduction of interest rate risk. However, manually creating a CD ladder – or any effective cash management strategy – can be a major undertaking for companies with substantial cash reserves.

An effective cash management strategy should maintain appropriate liquidity and full government insurance for every dollar. For businesses with millions in cash, achieving both of these goals manually requires lots of time and relationships with dozens of financial institutions. Fortunately, there is a simpler way – a partnership with ADM.

Invest Business Cash With ADM

At American Deposit Management, our modern cash solutions help businesses optimize their reserve funds in all market conditions. We offer liquid solutions for cash needed in the short term, CDs for longer-term investment, and customizable CD ladders to further tailor cash management to the unique needs of each company.

Our solutions deliver access to extended FDIC or NCUA insurance for the entire balance of a business’ cash – well above the traditional $250k limit. We also deliver nationally competitive returns from our nationwide network of financial institutions that compete for business cash.

Contact a member of our team today to get started with solutions that deliver unparalleled safety, predictable liquidity, and competitive returns.

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