Fidelity posted a new commentary entitled, "Fed's Challenge Remains: Normalizing Rates without Undermining Growth" from its Leadership Series. Authors Michael Morin and Kerry Pope write, "Several Fed officials, including Chair Janet Yellen during a May speech at Harvard University, stated that a rate increase would be appropriate if the economy and labor markets continued to strengthen. She noted that the central bank would "cautiously" increase rates.... Notably, the phrase "in the coming months," which had been used by Ms. Yellen in recent communications and was likely intended to keep open the option of a June or July rate hike, was omitted from her speech on June 6 following the May payroll report -- a possible signal that the report had an impact on the near-term policy outlook. Anticipation of a potential rate increase as early as June significantly waned with the release of May's payroll data." They continue, "It is unclear whether institutional investors have not yet decided how the new rules will impact their investment allocations or if they have decided to remain in prime funds, but the move into government funds has been slower than anticipated. In the meantime, based on the yield differential between institutional prime and government money market funds (MMFs), shareholders are being paid to wait. Most of the outflows from prime funds have been attributed to about $280 billion moving into government MMFs. Conversions have also had some impact on bank funding rates. Looking forward, continued shifts in investor preference prior to October's regulatory deadline could further affect bank funding rates and may cause yield spreads between prime and government MMFs to widen further. Prime MMFs remain well positioned with shortened weighted-average maturities and enhanced liquidity to accommodate potential redemptions. Corporate bond proceeds flowing into MMFs have buoyed industry assets in recent months. However, the migration of other depositors away from banks due to regulatory pressures or rising market rates has slowed after an initial wave of activity. The Fed's one rate hike has not yet incentivized many depositors to move into market instruments, and at the same time, banks have created new product types and adjusted rates to retain attractive depositors. Once the Fed undertakes additional rate hikes, many depositors will likely opt for attractive market-sensitive alternatives, including MMFs."

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