The Upside of Fed Rate Increases
Yahoo Finance published a piece by Allan Sloan entitled, "Here's the upside of Fed rate increases for investors," which tells us, "We've been hearing a lot lately about the damage that the Federal Reserve’s rate increases have done to the prices of stocks, bonds, and homes. But there's a major upside to those rate increases that few people, if any, are talking about.... It's that income for holders of money market mutual funds is running tens of billions of dollars a year above where it was at the start of the year, with more big increases on tap as the Fed keeps raising rates." The article explains, "Here's the deal, based on numbers from money market maven Pete Crane, whose Crane Data publishes the monthly Money Fund Intelligence newsletter. When Crane and I talked a few days ago, he said that money funds were yielding about 0.6% [they're now up to 1.14%], up from a minuscule 0.02% at year-end 2021, before the Fed rate increases started. Sure, that doesn't sound like a big enough difference to matter. But if you apply those numbers to the $5 trillion of money market funds, you see that yields are currently running about $30 billion a year, up from about $1 billion at year end." Sloan writes, "Given that the Fed has just raised rates three-quarters of a percent and is talking about raising them another three-quarters at its July meeting, we're looking at another 1.5% growth in yields. Which works out to another $75 billion a year for money fund holders. The reason that money fund yields are rising so rapidly is that the funds' asset portfolios have an average maturity of only about 30 days. This means that the Fed's increases in short-term rates -- the only rates that the Fed controls directly -- flow into money fund owners' wallets almost immediately." He adds, "These income increases are the total opposite of what happened when the Fed started cutting rates to almost zero in 2009 to forestall a worldwide financial meltdown. Yields eroded rapidly, leaving money funds yielding essentially nothing for much of the past dozen-plus years. But now that pattern is reversing. 'A two percent money fund yield by year-end isn't a layup,' quips Pete Crane, 'but it's a short jump shot.' There are certainly plenty of financial downsides to the Fed’s rate raises.... However, those increases in money fund yields -- and the fact that those rising yields are likely to spur banks to raise rates on trillions of dollars of savings accounts to try to avoid deposit runoffs -- are giving us tens of billions of dollars of optimistic news. And these days, we need all the optimism that we can get."
