Last week, BNY Mellon's Dreyfus launched a new "podcast" series entitled, "Invested in cash," which "will feature some of the greatest minds within cash management sharing ideas, trends, changes, and opportunities across the spectrum of liquidity investing." The inaugural podcast features Patricia Larkin, Chief Investment Officer of the Dreyfus Money Market Funds. The description says, "Larkin frames the short-term fixed income market and how it is affected by rate hikes and inflation. She also discusses how investors may want to think about the market over the next several months." We excerpt from the interview below.

The podcast says, "Welcome and thank you for listening to our inaugural 'Dreyfus Podcast Series: Invested in Cash.' My name is Sue Anne Cormack. As director of sales at Dreyfus, our goal is that you find ongoing value in the ideas, trends, changes and opportunities across the spectrum of liquidity investing that we bring to you in our series of podcast. To start off our series, I'm joined by Patricia Larkin, who's the Chief Investment Officer for BNY Mellon Cash Investment Strategies, which is a division of the Dreyfus Corporation."

Cormack continues, "Patricia and her team are identified as the center of excellence for cash within the BNY Mellon organization managing approximately $200 billion dollars in assets under management. Today we will be discussing the short-term market, how it's affected by rate hikes, inflation, and how you as investors may want to think about the market over the next several months. So, thank you so much Tricia for joining us today. We're so grateful to have you here to help frame the short-term market. Would you please start with a high-level summary of the basic strategy of investing for money market funds and touch on how these funds are affected by rate hikes?"

Larkin answers, "Sure, thanks so much for having me today, Sue Ann.... Typically, a money fund can be chosen for myriad of reasons, such as diversification, liquidity, AAA or top ratings, expertise of the management company and the comfort of regulatory oversight. Our strategy starts with: 'know your customer,' and we have a dedicated sales force for this asset class. Consequently, the portfolio management team has a clear understanding of the asset flows which is an important piece of managing institutional funds."

She continues, "This allows us to look at what's going on domestically, the macroeconomic trends, if any, geopolitical issues that might be happening [around] the globe. [W]e pay close attention to the Federal Reserve Board's actions [and], most importantly, the liquidity needs of our shareholders. So, with all this in mind, we can determine how to deploy our cash, whether we are managing maturities, around maturities, rate increases or liquidity around a year-end or quarter-end. Naturally [we are] always focused on safety, liquidity, and then yield for our shareholders."

When asked about rate hikes, Larkin responds, "Interest rates will likely go up again this year. So, if the Fed is going to increase ... you will see rates on all short-term instruments going up. [For] 2a-7 funds ... some [will go up] immediately and some on a lag basis depending on type of investments in that particular portfolio. The Fed has been pretty verbal and open about policy this year -- likely rates will go up one or more times."

She states, "They have said three [hikes] for 2017; that certainly could change depending upon data as this Fed is very data dependent. We've already had one, and if the economy continues at its current growth rate or better then we certainly expect to see two.... The Fed has certainly prepared the market [for moves and they] will be well advertised, and we really feel, welcomed, as rates continue to move normalization."

Cormack also asks, "Is inflation a factor right now? And does that also have an effect on these funds?" Larkin tells her, "Certainly inflation has an effect on funds if it's on the uptick. The economy is doing well [and] inflation is not currently a factor because it's really coming in around a 2% or lower.... [T]his is one of the most important data points as they're looking at monetary policy.... So, certainly as I mentioned earlier, if rates are moving up and the economy is growing and things are moving in the right direction, one would anticipate seeing inflation moving up as well. Historically, you might see the Fed moving a little more aggressively with regards to interest rates. We don't anticipate that.... We anticipate the Fed to move twice more this year and the economy to grow at the moderate pace it has been."

Next, Cormack asks Larkin, "Can you touch on the overall outlook for the short-term markets? Are there any other major factors at play right now? How should investors interested in the money markets prepare or think about the next several months?" She explains, "We anticipate an active Fed. How the economy performs will certainly be a focal point. The new Administration and any policy changes coming out of Washington will certainly have an effect on the markets, albeit short-term or headline risk type of movements. But we certainly are keeping a close eye on the new administration and any upcoming policies."

She adds, "We remain focused and diligent in our approach to managing these 2a-7 funds.... We have a proven track record in doing so, and we ... always and continuously keep in mind safety, liquidity, and yield. As we look forward, we see ... a positive environment for this asset class. Interest rates have been as I mentioned, at historic lows. Investors certainly have a reason to be excited for the first time in a long time when thinking about money market funds as an attractive alternative for cash. So as we look forward to the next 3-6 months anticipate a lot of Fed speak, certainly movement in the upswing and rates, continued growth in the economy, and overall a healthy market."

Note: Dreyfus' next "Invested in cash" podcast will feature Peter Crane, President & CEO, Crane Data, LLC. Watch for coverage and excerpts of this next month.

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