In total, more than $4 trillion is focused on the short-term interest rate market.

Bank of AmericaThe lower limit of the range of the federal funds rate is likely to be broken

At a time when money markets are beginning to be flooded with cash, more and more investors are thinking about whether the Fed will adjust its monetary policy toolkit.

The dollar in the short-term financing market has exceeded the supply of investable securities, putting pressure on short-term interest rates. The impact has been partially mitigated by the Fed's existing monetary policy tools. But the Fed can continue to do so only if money market funds remain functioning (channelling more than $4tn of cash into short-term interest rate instruments).

Some wonder how long the Fed can contain the impact of rising cash reserves without adjusting some of the ancillary interest rates used to help guide the market, including zero yields on the reverse repo tool.

"there are too many zeros now," JPMorgan ChaseStrategist Teresa Ho said. "when you are in a crisis, zero is great, but when it comes to the weight of zero basis points, short-term interest rates are almost unbearable.

The Fed currently aims to keep its benchmark interest rate in the range of zero to 0.25%. Although Treasury yields and repo rates have been close to zero several times and sometimes even negative, the effective federal funds rate has been at least 5 basis points higher than zero in recent months, however, downward pressure on interest rates has been exacerbated by factors such as the Fed's asset purchase programme and bailout payments to taxpayers.

The relative activity of the federal funds rate proves to some extent the effectiveness of the Fed's reverse repo tool. Although it does not provide any returns for investors, the tool will not make investors backwards like negative yields. As a result, against this backdrop, the use of reverse repo tools has soared to more than $500 billion. The money deposited there will not lead to an imbalance between supply and demand in the Treasury bill and repo markets.

But money market funds may start to feel pain as this instrument, which provides almost no return, accounts for a growing share of the portfolio. Given management fees and other costs, some funds may start to lose money, which could prompt them to stop accepting new cash from investors or even close funds altogether. The move, in turn, could direct more money into Treasuries, the repo market and the federal funds rate market (because only specific institutions can use Fed interest rate tools such as overnight reverse repo), and the 0% floor of the federal funds rate could be lost.

Pete Crane, president and founder of Crane data, a money market information provider, said: "if this situation is expected to continue, smaller market participants may try to leave, and if all yields are below 5 basis points or even negative, that will force everyone to exit. It's only a matter of time. "

Deborah Cunningham, chief investment officer for global money markets at fund manager Federated Hermes, says some money fund operators may be reluctant to get cash from new clients for certain products. However, there are also some funds that are willing to meet the wishes of old clients. But near-zero interest rates are "creating more challenges", and the market is running unhealthily.

Given the risk of losing the Fed's interest rate floor, some observers believe the Fed may need to raise the so-called managed interest rate: the reverse repo tool rate and the excess reserve rate. By adjusting these tools, money market funds can be provided with some breathing space and systemic risk can be reduced. This is likely to be discussed at meetings of the Federal Open Market Committee on Tuesday and Wednesday, although there is still debate over the possibility and legitimacy of the move.

The Federal Reserve Bank of New York has been communicating with investors about the health of various short-term interest rate markets, Cunningham said. But she said she wouldn't be surprised even if the Fed didn't take any extra action. Once the debt ceiling is resolved, the market may ease itself.

"We just need to pray for good luck," she said.