Bloomberg on Money Funds and Rate Floor
Bloomberg's Businessweek took a closer look at the Fed's RRP facility in the article, "Money Funds Urge Wary Fed to Accept Closer Embrace on Rate Floor." Christopher Condon wrote: "The people who help manage $2.6 trillion of money-market mutual funds have a message for the Federal Reserve: When the time comes to raise interest rates, you may have to rely on us more than you would like. The managers are urging the Fed to be open to expanding a program intended to help nudge short-term rates higher by removing cash from the financial system through overnight transactions with money funds. Some Fed officials, such as New York Fed President William C. Dudley, are concerned that depending too heavily on the program could increase instability in a financial crisis. The fund managers warn that the Fed risks undermining the program altogether if it sticks with current constraints on borrowing through the facility. "They need to be flexible," David Sylvester, head of money-market funds at the investment unit of San Francisco-based Wells Fargo & Co., said in an interview. "They are in uncharted waters in trying to raise rates." The program -- called the overnight reverse repurchase facility -- exists because the Fed will face an unprecedented situation when it eventually moves to tighten credit in response to a recovering economy, most likely sometime next year. The Fed's usual means for doing so, raising its benchmark federal funds target rate to make it more expensive for banks to borrow from one another overnight, may not work this time. That's because the central bank has spent the past six years quadrupling its balance sheet to more than $4 trillion in an effort to stimulate the economy, flooding the banking system with excess reserves. As a result, banks have less need to borrow reserves from each other in the fed funds market, and consequently raising the fed funds rate -- which has been near zero since 2008 -- won't be effective in controlling short-term borrowing costs, market participants say. "It doesn't seem there are enough participants in the fed funds market at this point to actually allow that to occur," said Deborah Cunningham, chief investment officer for global money markets at Pittsburgh-based Federated Investors Inc." It goes on, "Comments from Fed governors reflect sharp divisions. St. Louis Fed President James Bullard said the Fed will probably use the program to borrow "several hundred billion" dollars from money funds, while Philadelphia Fed President Charles Plosser said "we may not need the reverse repo facility at all." ... The minutes and other comments revealed a continuing debate at the Fed over how deeply officials want to engage with non-bank counterparties, according to Alex Roever, head of U.S. interest-rate strategy at JPMorgan Chase & Co. in Chicago. "The view within the FOMC is evolving," he said. "But if they want to keep a floor under those rates, they’ll need to deal with those counterparties." While the reverse repo facility is maintaining that floor with about 95 participating funds and their $10 billion caps, fund managers point out the tool hasn't been tested in a scenario where the Fed is seeking to increase interest rates." Also, in other news, ICI released its weekly "Money Market Fund Assets" yesterday, saying, "Total money market fund assets decreased by $8.73 billion to $2.59 trillion for the week ended Wednesday, September 3, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $10.87 billion and prime funds increased by $1.00 billion. Tax-exempt money market funds increased by $1.14 billion."
