The impact of FOMC rate reductions on money-market fund yields is delayed compared with the federal funds rate; as a result, some companies are moving assets away from lower-yielding bank products into MMFs.
The U.S. Federal Reserve cut its short-term benchmark rate by 50 basis points (bps) on March 3, to a range of 1.0 percent to 1.25 percent, following an off-schedule meeting that caught many market participants by surprise. It was the Fed’s first unscheduled cut since the financial crisis. And many analysts expect an additional rate cut at next week’s scheduled policy meeting.
Last week’s move was uncharacteristically preemptive, designed to buoy markets before the full impact of the coronavirus could be felt on U.S. and global markets. Unlike this cut, reductions in 2008 and after the September 11 attacks in 2001 were reactive. In its commentary issued on March 5, Fidelity Investments explains:
“For policymakers, stepping in early to try to stem further volatility may have been one of the lessons learned from the financial crisis. However, the market reaction to the cut will put the Federal Open Markets Committee (FOMC) in a challenging position, given the already low level of rates. Further rate cuts may be welcome to the financial markets but may not help industries and supply/demand dynamics that are focused on the spread of the coronavirus.”
From ICD’s vantage point as an independent portal provider for corporate treasury organizations investing in money market funds (MMFs) and short-term instruments, we are seeing clients moving assets away from lower-yielding bank products into money market funds. As the chart below indicates, the impact of FOMC rate reductions on money market fund yields is delayed compared with the federal funds rate.