Fed Raises IOER, RRP Rates 5 Bps
While the Federal Reserve's FOMC Statement was relatively uneventful from yesterday's meeting, Fed Chair Jerome Powell commented, "On a final note, we made a technical adjustment today to the Federal Reserve's administered rates. The IOER and Overnight RRP rates we adjusted upward by 5 basis points in order to keep the Federal Funds Rate well within the target range and to support smooth functioning in money markets. This technical adjustment has no bearing on the appropriate path for the Federal Funds Rate or stance on monetary policy." Yesterday, mutual fund news website ignites discussed the issue in "Fed Meeting a 'Snoozer' for All but Money Funds." They tell us, "Managers of government money market funds may be holding their breath Wednesday in anticipation of the outcome of the Federal Reserve's two-day meeting that wraps up this afternoon. The Federal Reserve may announce that it will increase its so-called administered rates -- the interest that the central bank pays on excess reserves and on overnight reverse repurchase agreements, money market fund executives say. Increasing either one by even a handful of basis points would help government money funds contend with a market that has grown increasingly challenging for them to navigate, the executives say." The piece quotes BlackRock's Tom Callahan, "For the rest of the world, [the] Fed meeting is a snoozer with a pre-determined outcome, but for the money fund industry it's an eventful meeting." The ignites article quotes our Peter Crane, "If short-term Treasury yields drop to zero and remain there, only the largest money funds sponsors would likely be able to keep those products running for long... [T]he whole fee waiver question gets more intense [with zero yields] because waiving half or three-quarters of fees isn't going to kill you. Waiving all fees and even subsidizing -- nobody can do that for long." It adds, "Some sponsors may consider closing government funds to new investors if yields decline further, [Federated Hermes' Deborah] Cunningham says.... Fidelity soft-closed three Treasury money market funds in April of last year, after cash flooded into government funds during the coronavirus market sell-off.... The firm reopened them in September. Vanguard likewise soft-closed its $36.7 billion Treasury Money Market Fund in April of last year. The firm reopened the fund in August." Cunningham adds, "Raising the reverse repurchase rate by even a few basis points from where it currently sits at zero would help government money funds, as would bumping up the excess reserve rate from 10 bps."
