Crane Data Subscribers
Are Money Funds Lagging Inflation? Jaffe Says 'Yes', Crane Says 'No'. Financial columnist Chuck Jaffe discusses the risk of cash being eroded by inflation in a recent column, "One investment risk: Money fund yields are lagging inflation". He cites the flood of assets into money funds, saying, "As the Federal Reserve was slashing interest rates in recent weeks, billions of dollars in investor money was flowing into some of the most rate-sensitive investments out there, into funds that are almost certain to have a tough time keeping up with inflation." Jaffe cites 2007's CPI inflation rate of 4.1%. But other inflation indicators are much lower -- "core" CPI was 2.4% and the Fed's preferred GDP deflator was 2.2% in calendar '07. Jaffe says, "by the time current adjustments are complete, average money fund will yield about 2.5 percent". But he neglects to mention that money funds returned 5.0% in 2007 (as measured by our Crane 100 Money Fund Index), well above all inflation measures. Our Crane 100 averages 3.61% currently; it is expected to remain above 3.00%. Finally, inflation will likely `decline should the economy slow further. Crane Data believes money funds will continue beating inflation, and believes money funds have thoroughly outperformed inflation over their entire 35-year history. Jaffe quotes Crane, "The phrase 'Don't fight the Fed' applies to cash, too, where money market investors have to take what the Fed is giving. Right now, that means accepting inflation and low yields, which is not fun. But the big mistakes come when people get greedy, when someone fighting to preserve a yield of 5 percent takes risks far beyond the money market and blows up."
