Friday's WSJ.com featured an article entitled, "Money Markets Face Adverse Effects If Fed Cuts IOER, which wrote, "There are expectations across the market that a stimulus measure the Federal Reserve might announce next week will end up hurting investors in the very economy it's trying to revive. Some market participants expect the Fed, in its two-day policy meeting starting Tuesday, to try bolstering the economy by announcing a reduction or complete elimination of the interest it pays banks for storing excess cash at the central bank. Goldman Sachs said there's a 50% chance this will happen." (The Federal Reserve Board of Governors meets today and tomorrow.)
WSJ explains, "The goal is to push banks to start lending and get the economy flowing. But analysts say lowering the interest on excess reserves, or IOER, will end up adding pressure to already ultra-low investment yields, in turn hurting money-market funds that are struggling to generate returns. U.S. businesses and consumers' appetite to borrow still hasn't fully recovered since the 2008 financial crisis. That's left banks flush with cash, which they don't want these days. Not only will they earn less for their reserves if the Fed slashes the IOER, they'd also face higher fees for holding more deposits because of new FDIC guidelines."
The piece adds, "This will likely force investors into other safe, short-term investments to try scraping together some type of return. Cash would flood the money-market space, pushing yields down and compromising the already-paltry returns money-market funds make and their ability to pay the costs associated with running these funds. Some Federal Reserve officials have expressed concerns about this."
In other news, Reuters article "Rules clash could limit money fund rates: Fidelity," says, "Conflicting regulations could limit the rates that money market mutual funds pay investors, a senior Fidelity Investments executive said, reflecting some of the many forces weighing on the sector. Rules passed by the U.S. Securities and Exchange Commission in 2010 require funds operated by Fidelity and its rivals to own more short-term securities, said Robert Brown, president of Fidelity money fund operations, in a recent interview."
The article adds, "At the same time, international bank capital rules known as Basel III, still under development, would have banks rely more on long-term debt, which would reduce the supply of short-term instruments in which money funds invest. The result could be lower returns for money fund investors, Brown said, even once interest rates rise from their historic lows of late."
Reuters explains, "Lower rates will only add to the pressures on the $2.6 trillion money funds industry, which has grappled with yields close to zero for several years. Industry tracking site cranedata.com shows the highest-yielding money funds paying only around 15 basis points, for instance. Fidelity and other firms have waived millions of dollars of fees in response. Charles Schwab Corp waived $240 million in fees in the first six months of 2011 alone. Other industry specialists have also begun to voice concerns about the appeal of money funds."
