How Inflation May Change Where You Put Your Cash
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Money market mutual funds are convenient for individual investors and big institutions to keep money temporarily. However, their yields have been very low for years.
The Federal Reserve has begun to increase the short-term interest rate it controls, and money market fund yields available to consumers have started to rise. They will climb as long as the Fed increases short-term rates.
But the yield on the average big money market funds is still only roughly 0.6 percent. Considering the rate of inflation running at 8.6 percent annual rate in May 2022, that is a negative rate of return.
Money market mutual funds receive the reverse repurchase agreement, a.k.a. the reverse repo rate, for funds held by the Fed overnight, so it functions as a rough floor on yields.
That rate stands at 0.8 percent. It was close to zero for many months.
At the moment, short-term Treasury bills, with yields in the 0.85 - 1.05 percent range, provide a practical ceiling for funds that hold government securities.
If the operating expenses of money market funds exceed the income they bring in, the funds could theoretically pay negative yields.
in the current unsettled markets, many people need good places to keep their short-term cash. Money market funds could work, but with some qualifications.
The yields are still very low. They don’t keep up with inflation, and if they eventually do, that’s probably not good news either. Even if the Federal Reserve manages to reduce the rate of inflation close to its 2 percent target rate, it will slow the economy, perhaps tipping it into a recession.
If the slowdown is evident, the Fed is likely to start cutting rates, creating an opportunity for nimble money market fund managers to beat inflation by a small amount. While money market fund yields are improving, as an investment they remain a bad idea.
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