Federated Hermes' latest monthly commentary by Money Market CIO Deborah Cunningham is entitled, "Filling the pool again." Subtiled, "With the Fed on hold and tax collection over, assets resume flowing into liquidity products," it tells us, "Summer doesn't officially start until June 21, but Memorial Day marks the opening of public pools. That means municipalities were filling them in May with the clear, shimmering water that beckons children from coast to coast. Liquidity vehicles experienced their own flows in May (you probably knew I was headed in this direction...). Many lost assets in March and April, but it was largely due to corporate and individual tax dates, not from the beginning of the end of cash's reign." (Note: There's just one week until our big Money Fund Symposium show in Pittsburgh, June 12-14. We're still taking registrations and hope to see you there!)

She writes, "After two years of its kingly status, some would like to see other asset classes be more attractive. But money market funds, retail in particular, are only growing in favor as they ride the Federal Reserve's reticence to cut rates. Both total industry money funds and total industry retail funds had inflows in May. Modest, but inflows."

The Federated piece asks, "Could it be that the pool will overflow? Some media reports have issued concern that, due to elevated yields, earnings from money funds have risen to around 1% of U.S. GDP, suggesting the economy might not be as strong as it seems. Others have pointed to record amount of assets in money funds as a risk if clients reallocate to other investments when the Fed eases. The former claim is absurd. Money funds are simply another source of earnings, and consumers continue to spend."

It explains, "The latter argument falls apart when seen in relative terms. Since 2013, money fund assets worldwide have averaged 15-17% of total mutual fund assets and ETFs. At the end of 2023, that figure was 17.3%. For comparison, it was approximately 45% during the height of the Global Financial Crisis. The reasoning that the financial system is threatened by the success of liquidity products is specious. While it is always important to look for stress in the markets, this seems more a case of investor angst. Or maybe jealousy. In any case, we think there's room for liquidity vehicles to grow, and the expected influx of institutional assets have not begun in earnest yet."

Cunnigham then states, "Keeping with the swimming pool metaphor, the U.S. Treasury Department is acting like a drain. On May 29, it began a program to buy back a set amount of government securities. My colleague Susan Hill lays this out well in an earlier piece. The gist is that Secretary Janet Yellen and company want to support the Treasury market by increasing liquidity via purchases on the secondary market. The focus now is on bonds and notes, but Treasury plans on targeting bills to lessen market volatility when it issues fewer short-term securities because it has a surfeit of cash. While it won't make a ton of difference if the buyback amount is modest, as it has been so far, it can only help cash managers."

In a section titled, "Moving Target it says, "It would be easier to name the Fed governors and branch presidents who didn't speak in May than those who did. One gets the feeling that dissent will be coming, especially as the minutes of the May Federal Open Market Committee meeting were more hawkish than the neutral-to-dovish spin Chair Jerome Powell gave in his press conference. We already know that the three quarter-point cuts the Federal Reserve once penciled for the second half of this year have been postponed. We expect to get only one or two now."

Federated adds, "However, the specter of a rate hike raised its frightful head in the May meeting: 'Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.' Despite this warning, we do not anticipate a hike. One thing to note is that the idea that the Fed will avoid cutting rates in September so as not to appear to interfere with the general election, forgoing rate action when warranted by the data might also look politically motivated. The argument cuts both ways, so to speak."

In other news, the Federal Deposit Insurance Corporation released its latest "FDIC Quarterly Banking Profile," which says "Domestic deposits increased $190.7 billion (1.1 percent) from fourth quarter 2023, marking a second consecutive quarterly increase. Growth in transaction accounts led the increase (up $247.2 billion, or 4.0 percent), offsetting a decline in savings deposit balances (down $125.5 billion, or 1.5 percent). Estimated insured deposits increased $115.0 billion (1.1 percent) quarter over quarter. Estimated uninsured domestic deposits increased $63.3 billion (0.9 percent) during the quarter, the first reported quarterly increase since fourth quarter 2021. After seven consecutive quarters of growth, brokered deposits declined $10.2 billion (0.8 percent) from the previous quarter."

It explains, "Community banks reported an increase in domestic deposits of 1.0 percent ($22.8 billion) during first quarter 2024, down from the 1.2 percent increase reported in fourth quarter 2023. More than half of all community banks (61.9 percent) reported an increase in deposit balances from the previous quarter. Community banks reported growth in estimated insured deposits ($26.5 billion, or 1.7 percent), but a decline in estimated uninsured deposits ($3.4 billion, or 0.5 percent). In the first quarter, growth in interest-bearing deposits ($35.6 billion, or 2.1 percent) was somewhat offset by a decline in noninterest-bearing deposits ($12.9 billion, or 2.4 percent). Domestic deposits increased 2.9 percent ($64.0 billion) from one year earlier."

A press release, entitled, "FDIC-Insured Institutions Reported Net Income of $64.2 Billion," comments, "Reports from 4,568 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) report aggregate net income of $64.2 billion in first quarter 2024, an increase of $28.4 billion (79.5 percent) from the prior quarter. A large decline in noninterest expense because of several substantial, non-recurring items recognized by large banks in the prior quarter, as well as higher noninterest income and lower provision expenses this quarter, contributed to the quarterly increase. These and other financial results for first quarter 2024 are included in the FDIC's latest Quarterly Banking Profile released today."

FDIC Chairman Martin Gruenberg comments, "The banking industry continued to show resilience in the first quarter. Net income rebounded, asset quality metrics remained generally favorable, and the industry's liquidity was stable. However, the banking industry still faces significant downside risks from the continued effects of inflation, volatility in market interest rates, and geopolitical uncertainty. In addition, deterioration in certain loan portfolios, particularly office properties and credit cards, continues to warrant monitoring. <b:>`_."

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