The Federal Reserve raised short-term interest rates from a range of 2.00-2.25% to a range of 2.25-2.50% yesterday, their 9th 1/4-point hike since December 2015 and 4th hike of 2018. Money market fund yields, which have inched higher in recent days, should again move upwards over the next several weeks. Our Crane 100 Money Fund Index is now at 2.10%, up 4 basis points from 11/30/18 and up 23 bps since 9/30/18. This average of the largest money fund yields (net, annualized) is up from 1.12% at the start of 2018, 0.43% at the start of 2017, and 0.06% at the start of 2016. Brokerage sweep rates and bank deposit rates should also continue to inch higher in coming days and weeks. The Crane 100 should move above 2.25% by mid-January, and the highest-yielding money funds should break well over 2.50% and approach 2.75% by next month.
The Wall Street Journal in "Fed Raises Rates, but Signals Slightly Milder Path of Future Increases," writes, "The Federal Reserve nudged up short-term interest rates for the fourth time this year, defying pressure from President Trump, but suggested it could slow the pace of increases next year in the face of new headwinds. Fed officials voted unanimously Wednesday on the increase, which will bring the benchmark federal-funds rate to a range between 2.25% and 2.5%, the ninth such rise since December 2015. They also indicated they think they won't need to raise rates as much next year as they had anticipated three months ago."
The latest "FOMC statement" explains, "Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance."
It continues, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook."
The Fed summarizes, "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 2-1/4 to 2 1/2 percent. (See also the "dot plot" release, "Federal Reserve Board and Federal Open Market Committee release economic projections from the December 18-19 FOMC meeting.")
They add, "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 maximum employment objective and its symmetric 2 percent inflation objective. 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."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Nov. 30, 2018) Tuesday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's Dec. 13 News, "Dec. MF Portfolio Holdings Break 3.0 Tril; T-Bills Up, Repo Breaks 1.0T.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in November, prime money market funds held 28.5 percent of their portfolios in daily liquid assets and 41.6 percent in weekly liquid assets, while government money market funds held 61.0 percent of their portfolios in daily liquid assets and 78.9 percent in weekly liquid assets." Prime DLA increased from 24.1%, and Prime WLA decreased from 43.3% in October. Govt MMFs' DLA decreased from 61.4% in Oct. and Govt WLA increased from 78.1% last month.
ICI explains, "At the end of November, prime funds had a weighted average maturity (WAM) of 32 days and a weighted average life (WAL) of 71 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 31 days and a WAL of 87 days." `Prime WAMs were up two days from last month, and WALs were up four days. Govt WAMs were down one day from Oct., and Govt WALs were down two days from last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $212.05 billion in October to $226.86 billion in November. Government money market funds’ holdings attributable to the Americas rose from $1,729.35 billion in October to $1,779.61 billion in November."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $226.9 billion, or 41.3%; Asia and Pacific at $109.5 billion, or 19.9%; Europe at $209.3 billion, or 38.1%; and, Other (including Supranational) at $4.1 billion, or 0.8%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.780 trillion, or 78.4%; Asia and Pacific at $122.9 billion, or 5.4%; and Europe at $361.2 billion, or 15.9%.
