The Federal Reserve Bank of New York's "Liberty Street Economics" blog published the piece, "Monetary Policy Transmission and the Size of the Money Market Fund Industry." Written by Marco Cipriani, Jeff Gortmaker and Gabriele La Spada, it tells us, "In a recent post, we documented the transmission of monetary policy through money market funds (MMFs). In this post, we complement that analysis by comparing the transmission of monetary policy via MMFs to the transmission via bank deposits and studying the impact of the differential pass-through on the size of the MMF industry. To this purpose, we focus on rates on certificates of deposit (CDs) offered to banks’ retail customers and compare their response to monetary policy with that of retail MMF yields."
The article explains, "[A] chart ... shows the time series of three-month CD rates, MMF net yields, and the effective federal funds rate. Although both CD rates and MMF yields track the federal funds rate, their response to monetary policy changes is starkly different and has become even more so during the last tightening cycle. Between May 2004 and July 2006, the effective fed funds rate increased from 100 to 525 basis points (bps). During the same period, the net yield of retail MMFs increased by roughly the same amount, from 0.5 percent in May 2004 to 5 percent in July 2006.... [T]his corresponds to a pass-through of 99 percent. In contrast, over the same period, rates on three-month retail CDs increased only by half as much, reaching 3 percent in July 2006 -- a pass-through of only 50 percent. The pass-through on one-month CD rates was even lower, just 30 percent."
The NY Fed economists write, "After a long period with policy rates at the zero lower bound, the Federal Reserve started a new tightening cycle in December 2015, which continued until December 2018. Over this period, the effective federal funds rate increased by more than 200 bps. Over the same period, the net yield of retail MMFs increased by roughly the same amount, with a pass-through of 91 percent, confirming the very high elasticity (or beta) to rate hikes observed in the early 2000s. In contrast, rates on retail CDs barely moved. The rate on three-month CDs remained below 10 bps until July 2017, and only increased to 20 bps by the end of the tightening cycle, a pass-through of only 5 percent; the pass-through to the one-month CD rate was similarly low, at only 2 percent."
The post continues, "Given the lower responsiveness of bank CDs to monetary policy tightening, one could expect that, during a tightening cycle, money flows from CDs to MMFs. Indeed ... the size of the MMF industry increased during both tightening episodes, lagging the increase in the spread between retail MMF yields and CD rates by roughly a year. From May 2004 until July 2006, the assets under management (AUM) of retail MMFs increased by 5 percent, followed by a further increase of 16 percent over the next year. Consistent with the fact that rates on bank deposits have become stickier, during the last tightening cycle, the MMF industry increased even more dramatically. AUM of retail MMFs increased from $700 billion in December 2015 to almost $1 trillion in December 2018, a 37 percent hike, and kept increasing during the first half of 2019."
It adds, "A possible explanation for the lower elasticity of bank CD rates during the last tightening cycle is the effect of the 2014 MMF reform by the Securities and Exchange Commission, which went into effect in October 2016. By stripping prime MMFs of some of their liquidity features, the reform has made such investment vehicles a less attractive option for cash investors. The sharp increase in the size of the MMF industry over the last three years belies such an explanation. If anything, as described above, the AUM of retail MMFs have increased even more sharply than in the early 2000s. Indeed, as documented by Cipriani and La Spada (2018), although prime MMFs have become a less attractive liquidity vehicle and have shrunk as a result of the reform, investors have shifted to government MMFs, which were not affected by the amended rules."
Finally, they conclude, "The elasticity of bank CD rates to monetary policy tightening is much lower than that of MMF shares and has become ever lower after the financial crisis. The weaker elasticity of CD rates relative to MMF shares is accompanied by an expansion of the size of the MMF industry during tightening cycles. Such expansion was more pronounced for the last tightening cycle than during the previous one. This evidence casts doubt on the view that the MMF reform is a reason why the beta on CD rates has become so negligible."
In other news, money fund assets plummeted over the past week, their first drop in 5 weeks and just the second decline over the past 12 weeks. Assets have increased in 27 of the past 31 weeks. ICI's latest "Money Market Fund Assets" report shows that MMF totals have increased by $479 billion, or 15.7%, year-to-date in 2019. Over the past 52 weeks, ICI's money fund asset series has increased by $588 billion, or 20.0%, with Retail MMFs rising by $233 billion (21.0%) and Inst MMFs rising by $355 billion (19.4%).
ICI writes, "Total money market fund assets decreased by $45.90 billion to $3.53 trillion for the week ended Wednesday, November 20, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $53.33 billion and prime funds increased by $7.00 billion. Tax-exempt money market funds increased by $432 million." ICI's weekly series shows Institutional MMFs falling $34.0 billion and Retail MMFs decreasing $11.9 billion. Total Government MMF assets, including Treasury funds, were $2.614 trillion (74.1% of all money funds), while Total Prime MMFs were $773.3 billion (21.9%). Tax Exempt MMFs totaled $138.8 billion, 3.9%.
They explain, "Assets of retail money market funds decreased by $11.91 billion to $1.34 trillion. Among retail funds, government money market fund assets decreased by $14.21 billion to $758.78 billion, prime money market fund assets increased by $2.17 billion to $457.48 billion, and tax-exempt fund assets increased by $141 million to $125.70 billion." Retail assets account for over a third of total assets, or 38.1%, and Government Retail assets make up 56.5% of all Retail MMFs.
The release adds, "Assets of institutional money market funds decreased by $33.99 billion to $2.18 trillion. Among institutional funds, government money market fund assets decreased by $39.12 billion to $1.86 trillion, prime money market fund assets increased by $4.83 billion to $315.85 billion, and tax-exempt fund assets increased by $291 million to $13.05 billion." Institutional assets accounted for 61.9% of all MMF assets, with Government Institutional assets making up 84.9% of all Institutional MMF totals.
Crane Data's separate Money Fund Intelligence Daily series shows overall money fund assets up $30.4 billion month-to-date (through 11/20) to $3.875 trillion. Prime MMF assets are up $38.7B MTD, while Government assets are down $12.2B. (Note: Several funds were liquidated Monday, including all of the PNC Money Funds (which merged into Federated MMFs) and two UBS MMFs. These declines totaled $15.6 billion, but most of PNC's $11.3 billion in MMFs shifted into (and reappeared in) Federated MMFs. (The UBS fund assets apparently shifted to bank sweeps, and other UBS funds showed asset declines too.) We're not sure what exactly accounted for the bulk of this week's declines, but normally big outflows are due to tax payments, bond settlements and/or merger closings.
