A press release entitled, "Moody's: Global money market fund industry 2017 outlook stable, revised from negative in 2016" tells us that, "Moody's Investors Service's outlook for the global money market fund (MMF) industry is stable for 2017, from previously being negative for 2016. Reduced uncertainty surrounding regulatory reform supports the stable outlook. Moody's report, entitled "Money Market Funds -- Global: 2017 Outlook - Reduced Regulatory Uncertainty Supports Stable Outlook," is available on www.moodys.com." We review this below and also quote from the Federal Reserve's latest statement.
Vanessa Robert, a Vice President at Moody's, comments, "We changed the outlook for MMFs to stable for 2017 to reflect our renewed confidence in the industry, given its resilience during this period of transformational change. We consider that fund managers will conservatively manage portfolios in the new regulatory regime." Assistant Vice President David Wang adds, "While $1 trillion of assets have moved around within the industry, it has survived and can move forward in a more sound fashion.
The update says, "Moody's previously negative outlook on the money market fund industry for 2016 was driven by uncertainty surrounding the impact of transformational regulatory reform in the US and the ability of the industry to effectively manage the transition to a new regulatory regime. Moody's says regulatory uncertainty is receding."
They explain, "The conversion of institutional prime and tax-exempt funds to VNAV and the adoption of liquidity fees and gates on all non-government MMFs led to a shift in the mix of industry assets which far exceeded most estimates. Prime money market funds have already lost more than $1 trillion of assets as a result of the new rules, which allow managers to gate redemptions and impose fees should there be a threat to liquidity. However, most assets transferred into government money market funds and did not leave the sector altogether. In Europe, money market fund rules will be finalized in 2017, but are unlikely to be implemented before 2019."
The Moody's piece tells us, "The supply of highly rated short-term investments is less of a concern, according to the rating agency. In the US, the contraction of prime funds has sharply reduced their demand for short-term investments, and government funds also have no shortage of investable assets given higher Treasuries issuance and expanded repo availability. In Europe, supply has increased because certain issuers that once tapped the US market are turning to Europe, given diminished US MMF demand for short-term bank and corporate debt."
Finally, it adds, "Moody's says industry assets will be stable, despite negative or low rates in Europe and possible rate hikes in the US. Despite negative or low rates in Europe, money market fund asset levels will likely stay stable. MMFs remain an attractive investment option relative to bank deposits at a time when European banks' appetite for deposits has waned owing to regulatory pressures. In the US, where rate hikes are on the horizon, money market funds have been shortening portfolio durations to around five days, making portfolio net asset values less sensitive to rate increases."
In other news, the Federal Reserve Board issued its latest statement on interest rates, saying, "Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee's 2 percent longer-run objective."
It continues, "Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."
The Fed's statement tells us, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
It adds, "In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
