The Federal Reserve raised short-term interest rates again yesterday, their second hike in 3 months and just the third in 10 years. Money fund investors and managers should benefit almost immediately, as rates are expected to move higher immediately following the move. Currently, money funds have an average weighted average maturity (WAM) of 35 days, so funds should reflect the 25 basis point higher yields fully in just over a month. Average yields for money funds are currently 0.50%, as measured by our Crane 100 MF Index, so yields hould move towards 0.75% over the coming weeks. The highest-yielding money funds, currently 0.8-0.9%, should break over 1.0% within weeks. Given expectations for even more Fed hikes in 2017, money fund yields, and revenues (as fee waivers melt away), are looking up for 2017. We review the Fed move and statements below.
The FOMC's Statement says, "Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace.... In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation."
It explains, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
The FOMC adds, "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Federal Reserve Chair Yellen says in her press conference statement, "Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 3/4 to 1 percent. Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy's continued progress toward the employment and price stability objectives assigned to us by law. For some time the Committee has judged that, if economic conditions evolved as anticipated, gradual increases in the federal funds rate would likely be appropriate to achieve and maintain our objectives. Today's decision is in line with that view and does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy."
She continues, "Returning to monetary policy, the Committee judged that a modest increase in the federal funds rate is appropriate in light of the economy's solid progress toward our goals of maximum employment and price stability. Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market and a sustained return to 2 percent inflation. Today's decision also reflects our view that waiting too long to scale back some accommodation could potentially require us to raise rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and pushing the economy into recession <b:>`_."
Yellen also says, "We continue to expect that the ongoing strength of the economy will warrant gradual increases in the federal funds rate to achieve and maintain our objectives. That's based on our view that the neutral nominal federal funds rate--that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel--is currently quite low by historical standards. That means that the federal funds rate does not have to rise all that much to get to a neutral policy stance. We also expect the neutral level of the federal funds rate to rise somewhat over time, meaning that additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion. Even so, the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is still likely to remain below levels that prevailed in previous decades."
She adds, "This view is consistent with participants' projections of appropriate monetary policy. The median projection for the federal funds rate is 1.4 percent at the end of this year, 2.1 percent at the end of next year, and 3 percent at the end of 2019, in line with its estimated longer-run value. Compared with the projections made in December, the median path for the federal funds rate is essentially unchanged. As always, the economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to their economic outlooks and views of the risks to their outlooks."
The Wall Street Journal commented, "The Federal Reserve said Wednesday it would raise short-term interest rates and keep lifting them this year, moving the central bank into a new, more aggressive phase of draining easy money from the financial system as the economy improves. Officials said they would raise their benchmark federal-funds rate by a quarter percentage point to a range between 0.75% and 1%, and penciled in two more increases this year."
The article adds, "Nearly seven in 10 economists polled by The Wall Street Journal expect the second rate increase in June, while one in five expect it in September. How interest rates -- on savings accounts, auto loans, mortgages, credit cards and corporate loans - rise from here depends on how investors, consumers and businesses respond. Rates for credit cards are tied to the prime rate -- set by banks for their best customers -- which is more directly linked to federal-funds rate."
