The Federal Reserve cut short-term interest rates for the first time since December 2008, lowering the range for its Federal funds target rate by 1/4 point to 2.00-2.25%. Money market mutual fund rates, which have been inching lower over the past 2 months in anticipation of the cut, should decline in the weeks ahead to reflect the full quarter-point. Our Crane 100 Money Fund Index, which is currently at 2.12%, was 2.18% at the end of June and 2.22% two months ago, so money market funds are already reflecting a large portion of the latest cut. We expect the Crane 100 to fall below 2.00% by the end of August. Our broader Crane Money Fund Average, which tracks 657 taxable money funds, is currently 1.98%. It fell below the 2.00% level last week and was 2.08% 2 months ago.
The Federal Reserve's FOMC Statement says, "Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed."
It explains, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent. This action supports the Committee's view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective."
The Fed's statement adds, "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. The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated."
The Wall Street Journal, in its piece, "Fed Cuts Rates by a Quarter in Precautionary Move," comments, "Mr. Powell said officials weren't ruling out additional rate reductions, but neither did officials view Wednesday's action as 'the beginning of a long series of rate cuts,' he said. 'You would do that if you saw real economic weakness.... That's not what we're seeing. Instead, he framed the decision to lower the Fed's benchmark short-term rate to a range between 2% and 2.25% as a 'mid-cycle adjustment.'"
In other news, Financial Planning writes, "Veterans with USAA to see reduced cash yields following Schwab deal." The article explains, "Charles Schwab's purchase of 1 million USAA accounts will benefit the industry titan's bottom line -- but it will also cut into returns on cash belonging to veterans and their families. As part of the deal set to close in 2020, Schwab will sweep $7 billion in cash from USAA retail brokerage accounts -- currently held in money market funds -- into Schwab's bank, CFO Peter Crawford told analysts and shareholders on a webcast last week."
It continues, "Currently, cash sitting in USAA clients' brokerage accounts defaults to one of three funds: the USAA Money Market Fund, which has a 1-year yield of 1.93% and 0.62% expense ratio; USAA Treasury Money Market Trust, which has a 1-year yield of 1.91% and 0.35% expense ratio or the USAA Tax-Exempt Money Market Fund, which has a 1-year yield of 1.11% and .56% expense ratio, according to USAA spokesman Matt Hartwig. By contrast, Schwab's bank sweep will give USAA clients a .26% annual percentage yield (clients with over $1 million invested will have a .65% APY), according to the company. Interest-earning assets are profitable for Schwab, which earned an average yield rate of 2.42% on cash and cash equivalents in the first quarter of this year, according to the company's earnings statement."
The piece adds, "Schwab moved $11.6 billion out of money market funds in the first three months of 2019, according to its earning statement. Schwab's average interest-earning assets were 15% higher in these months -- primarily due to the bank sweeps -- compared to the year-ago period, the filing says. The sweep also played a key role in saving the company $96 million in asset management and administration fees. Schwab is far from the only brokerage that is looking to profit from cash. 'It's sort of become an industry practice,' says Tim Welsh, consultant at Nexus Strategy, referring to the bank sweeps, who notes it's a natural next step as fees fall."
It adds, "Pete Crane, president of Crane Data, which tracks money fund and brokerage sweep data and returns, agrees. 'Brokerages have been under severe stress to find new areas of profitability, and bank sweep programs were a godsend for them,' he says. Firms profiting off brokerage sweeps include LPL Financial, TD Ameritrade, Wells Fargo Advisors, Raymond James and E-Trade." (The article includes a chart of sweep rates sourced to Crane Data's Brokerage Sweep Intelligence too.)
Finally, Financial Planning writes, "However, financial advisors are paying attention, pushing clients into money market funds as brokerages increasingly turn to brokerage and bank sweeps, Crane says. 'All you have to do is call or click or ask and do a position trade or a ticket trade to move into a higher yielding money fund,' Crane says." (For more, see these Crane Data News articles: Schwab Completes Shift from Money Funds to FDIC; LPL Changes Sweeps (7/18/19) and Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump (1/4/18).)
