Money fund, brokerage sweep, bank savings and "robo" yields all moved lower in the days following the Federal Reserve's rate cut last Wednesday. Money market mutual fund rates, which had been inching down in the 2 months prior to the cut, have declined by 6 basis points over the past 3 days. Our weekly Brokerage Sweep Intelligence publication shows 4 brokerages cut their sweep rates (out of 11), and the two main "fin-tech" advisors offering savings products both cut rates by 1/4 point. Our Crane 100 Money Fund Index, currently at 2.06%, was 2.18% at the end of June and 2.22% two months ago. Rates should continue inching lower in coming weeks.
Looking at brokerage sweep rates, Merrill Lynch dropped its yields to become the lowest-paying brokerage firm. Merrill cut rates for balances below $250K from 0.14% to 0.05% in the latest week, according to our Brokerage Sweep Intelligence, and they trimmed rates for balances at $250K to under $1 million from 0.33% to 0.10%. Balances over $1 million now earn 0.40% (down from 0.60%) while balances over $10 million now earn 0.55% (vs. 0.75% before).
Schwab, TD Ameritrade and UBS also all lowered rates in the past week too. For balances under $1 million, Schwab cut rates from 0.26% to 0.18%, while it also cut rates for balances over to 0.61% to 0.65%. TD Ameritrade trimmed rates across the board; their rate for $100K balances is now 0.07% from 0.10%. UBS cuts its rates for balances under $250K to 0.18% from 0.25%. We expect more trimming in the coming weeks as pressure builds on brokerages to maintain net interest margins.
Our Crane Brokerage Sweep Index, an average of the 11 largest brokerage firms' "sweep" rates, is currently 0.28% for balances under $100K, down 2 bps from 0.30% last week, while rates below this are now paying 0.22% (down from 0.24%). The average FDIC sweep rate is now 0.35% for balances under $500K (and over $250K), 0.40% for balances under $1 million, 0.59% for balances under $5 million and 0.72% for balances over $5 million.
Fidelity is still offering by far the highest FDIC-insured sweep rates among the $100K balance tier, with a yield of 0.79% as of August 2. RW Baird occupies the No. 2 spot in the weekly survey, paying out 0.55% on its $100K tier. Raymond James ranks third with a rate of 0.40% at the $100K tier, followed by Wells Fargo and Ameriprise , both with a 0.25% rate. UBS and Schwab both yielding 0.18% on balances of $100K. E*Trade and Morgan Stanley offer just 0.15%, Ameritrade pays 0.07% and Merrill ranks last at just 0.05%.
Fin-tech "robo" advisors also cut rates. Despite increasing rates to 2.57% at the end of June, Wealthfront's rate recently took a 0.25% drop, landing at 2.32% following the Fed cut. In a June blogpost, "How the Fed Funds Rate Impacts the Wealthfront Cash Account," Co-Founder Andy Rachleff said, "But what happens if the Fed lowers their target range for the fed funds rate? If the rate is lowered by 0.25%, then we will have to lower the rate for our cash account by the same amount. In contrast, the vast majority of our competitors will likely lower their rates even more than 0.25%.... Most banks only give you a portion of any rate increase, and decrease rates by more than any fed funds rate decrease, to maximize their margins. Avoiding this practice is one of the many ways we put your interests first."
Betterment also passed through the rate drop, shifting from 2.65% to 2.44%. Betterment addresses rate changes in, "Betterment Everyday Savings has a Variable APY: What That Means for You." The article says, "If the Federal Reserve lowers its target range, the interest rate on Betterment Everyday Savings will generally change by a similar amount.... Because Savings tracks closely with the Federal Funds Rate, you can expect that, in the future, our Savings rate will continue to track alongside the Federal Funds Rate as it goes down. The structure of Betterment Everyday Savings is aligned with our customers' interests to keep our rate highly competitive -- even as interest rates decline overall."
For more on brokerage sweeps and "robos", see these `Crane Data News articles: Fed Cuts Rates Quarter to 2.0-2.25 Percent; FP on USAA, Schwab Deal (8/1/19), Cash Next Big Thing for Robos Says Barron's; Betterment Hikes Rates (7/30/19), Schwab Completes Shift from Money Funds to FDIC; LPL Changes Sweeps (7/18/19), Brokerage Sweep Rates Flat; MS, E*Trade Earnings; TD Lowers Rates (4/23/19), BNY Keeps Dreyfus Name on Money Funds; Brokerage Sweep Rates Flat (3/5/19), Edward Jones Latest to Shift to FDIC Sweeps; ICI: MMFs Break $3T in '18 (1/31/19) and Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump (1/4/18).
In related news, Federated Investors' Deborah Cunningham's latest monthly commentary, "Searching for neutral," tells us, "Neutral is not a position much in favor these days, but Federal Reserve policymakers would love to get the federal funds rate there. They have targeted 2% for some time now, but lately aren't sure that is the correct level. At one point they talked about it being somewhere within a range of 2.75-3%, then somewhere in a much lower span of 2-2.5%. With inflation measured by personal consumption expenditures stubbornly refusing to get to 2%, even the latter range might be too high."
The article continues, "That search is at the heart of the members of the Federal Open Market Committee's decision to cut the target range of the fed funds rate by a quarter point [last week]. They have made clear this is not the beginning of a path leading to zero rates as we experienced following the financial crisis, but rather a pullback from December's hike that shot too high. There were no projections from this meeting, but Chair Jerome Powell suggested that another move may or may not be warranted, and the futures market is expecting at least one more. The hunt continues."
Finally, it adds, "Participants in the liquidity marketplace found an ample supply of securities in July, particularly in the repo market and in the Treasury market. There also were fewer buyers in the marketplace and money market funds -- not Federated -- lost assets. Combine all of these and repo rates hung in there at elevated levels throughout the month. We did not adjust our weighted average maturity (WAM) ranges in July, still 30-40 days for our government funds and 40-50 days for prime and municipal funds. On a fixed-rate basis, we are sticking with the 3- and 4-month areas, not going too far out beyond that."
