The Federal Reserve Board of Governors voted to reduce its `target Fed funds interest rate to "a target from zero to a quarter percent" from its previous 1.00%, their 10th cut in the past 15 months. While the zero yields will place pressure on money market mutual fund fees, we do not expect it to deal a critical blow to the sector due to the fact that most money market rates remain well above the Fed funds target."
The Fed's statement says, "The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."
"Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," says the Fed.
It continues, "The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."
Look for more analysis in coming days, but see previous Crane Data commentary on the subject, including "Taking Another Look at Money Funds Yielding Under One-Half a Percent," "Video: Crane Says Money Fund Yields May Fall to Less Than Zero," and "First Money Fund Pays Negative Yield Story in MFI Incorrect."
As we added to our News article Monday, "Our Money Fund Intelligence Daily statistics from Friday (12/12) show that among the 500 largest money funds there are three funds with negative 7-day yields (though investor returns remain positive due to capital gains), five funds with zero yields, and 13 funds with 0.01% yields. Forty one funds have yields of 0.05% or lower (5.4% of assets), 89 funds have yields of 0.25% or lower (13.3% of assets), and 147 funds (23.2%) have yields of 0.50% or lower. Our Crane 100 yielded 1.40% and our broader Crane Money Fund Average yielded 1.08% as of Friday. Finally, remember that the majority of these funds too are Treasury funds, which may see yields rebound as year-end pressures abate."
