The Federal Reserve Bank of New York published "Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update" on its "Liberty Street Economics blog. The piece explains, "The size of the money market fund (MMF) industry co-moves with the monetary policy cycle. In a post published in 2019, we showed that this co-movement is likely due to the stronger response of MMF yields to monetary policy tightening relative to bank deposit rates, combined with MMF shares and bank deposits being close substitutes from an investor's perspective. In this post, we update the analysis and zoom in to the current monetary policy tightening by the Federal Reserve." (Note: Total money fund assets eked out another record on Friday, March 31, rising $3.5 billion to $5.610 trillion. For the month of March, MMF assets jumped $357.1 billion.)
Discussing "Differential Betas on Bank Deposits and MMF Shares," they write, "The Federal Open Market Committee (FOMC) adjusts the stance of monetary policy primarily by changing the target range for the federal funds rate, the interest rate banks charge each other for overnight unsecured loans of funds. Changes in the target range are implemented via two policy tools -- the rate paid on banks' reserve balances and the rate offered at the overnight reverse repo facility -- that influence rates in the federal funds market. Changes in federal funds rates are then passed through to other rates, including the interest rates banks and non-bank money managers offer to their clients. The pace at which changes in the policy stance are transmitted and affect broad financial conditions is a key determinant of the impact of monetary policy on economic conditions."
A chart in the article shows that, "the response of retail three-month CD rates to changes in monetary policy (the so-called deposit beta) is much slower than that of MMF shares, which for symmetry with the deposit beta, we call the MMF beta. Indeed, since March 2022, yields on MMFs have risen by 4.13 percentage points, or 97 percent of the EFFR increase, whereas CD rates have only risen by 0.32 percentage points, or 8 percent of the increase in the EFFR."
The blog says, "The differential betas are not just a feature of the most recent policy cycle; ... between 2002 and January 2023, the deposit beta was 26 percent: that is, a one percentage point increase in the EFFR leads to a 0.26 percentage point increase in the CD rate. In contrast, a one percentage point increase in the EFFR increases MMF yields by 0.88 percentage points. One reason for the difference in betas could be the level of sophistication of retail and institutional investors. However, while the yields of MMFs catering to institutional investors respond more quickly to monetary policy changes, as we show in this post, retail MMFs also have much higher betas than bank deposits: in 2002-23, for instance, the beta on retail MMF shares was 86 percent, three times larger than the deposit beta."
It continues, "The deposit and MMF betas have also diverged over time. As discussed in this post, deposit betas have attenuated over the last twenty years, whereas the betas on MMF shares have remained roughly constant. Indeed, ... the deposit beta decreased from 42 percent in 2002-09 to 8 percent in 2010-23, while the MMF beta stayed flat at around 90 percent across the two periods."
The blog comments, "In a recently published staff report, we show that a one percentage point increase in the EFFR increases the AUM of the average MMF by roughly 6 percent over two years. Given that our sample contains 500 MMFs with an average AUM of $5 billion, a one percentage point increase in the EFFR is estimated to increase the AUM of the MMF industry by $150 billion over the following two years. Similarly, the ratio of MMFs' AUM to bank deposits increases by 6 percent over the same horizon."
It adds, "It is worth noting that, ... the MMF industry did not shrink significantly after rates were cut in 2020; rather, it grew after the Federal Reserve rapidly increased its balance sheet in response to the COVID-19 financial crisis. The reason, as we will explain in a future post, is that a larger balance sheet puts pressure on depository institutions by affecting their regulatory constraints, and gives them an incentive to shed deposits, which in turn flow to MMF shares, a close substitute. Moreover, current policy tightening has just started to have an impact on the MMF industry, with the size of the industry starting to tick upward after August 2022."
Finally, the blog summarizes, "This post updates the findings of our previous work on the relationship between monetary policy, MMF yields, and the size of the MMF industry. During the current tightening cycle, MMF yields have increased by 4.13 percentage points, in line with our previous estimate of the beta on MMF shares between 2002 and 2020; in contrast, deposit rates have remained flat. Moreover, consistent with these results, the AUM of the MMF industry has increased as the Federal Reserve has tightened rates, from $4.31 trillion in April 2022 to $4.62 trillion in January 2023. The relatively small magnitude of this increase in the size of the MMF industry, against a rate hike of 4.25 percentage points, is likely due to a lag with which monetary policy affects investor flows in MMFs; the recent monetary policy tightening, in fact, could lead to a further expansion of the MMF industry in the near future."
In other news, "money fund yields were higher last week as they continued to digest the Fed's March 22nd 25 basis point rate hike. Yields should inch higher this week as the Fed move continues to work its way through funds' 7-day yields. Our Crane 100 Money Fund Index (7-Day Yield) was up 12 bps at 4.61% in the week ended Friday, 3/31. Yields are up from 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. A handful of the top-yielding money market funds (8) broke the 5.0% level over the past week.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 687), shows a 7-day yield of 4.49%, up 11 bps in the week through Friday. Prime Inst MFs were up 13 bps at 4.72% in the latest week. Government Inst MFs rose by 12 bps to 4.58%. Treasury Inst MFs up 6 bps for the week at 4.46%. Treasury Retail MFs currently yield 4.24%, Government Retail MFs yield 4.29%, and Prime Retail MFs yield 4.55%, Tax-exempt MF 7-day yields were up at 3.59%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (3/31), zero money funds (out of 823 total) yield under 2.0%; just 8 funds yield between 2.00% and 2.99% with $37 million, or 0.0%; 169 funds yield between 3.00% and 3.99% ($137.4 billion, or 2.4%), and 646 funds yield 4.0% or more ($5.472 trillion, or 97.6%). Eight funds have now officially surpassed the 5.0% mark (though most are private and not listed in our "Highest-Yielding Funds" table above) and we expect more to follow in coming days.
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.55% after increasing 1 bp the week prior. The latest Brokerage Sweep Intelligence, with data as of March 31, shows that there were no changes over the past week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
