This reminds me of the movie “The NeverEnding Story.”
(Bloomberg) — Money-market investors are intensifying their focus on what the Federal Reserve might need to do to maintain a firm hand on the short-term interest rates it uses to implement monetary policy and if it could start to tinker with its toolkit this week to provide some relief for money-market funds.
The Fed’s existing facilities have helped alleviate the impact of the growing dollar glut in short-term funding markets that’s outstripping the supply of investable securities and weighing down front-end rates. But officials can only continue to do so if money-market funds, which help funnel more than $4 trillion of cash investments into short-term instruments, are functioning properly.
Now, some are now wondering how long the Fed can stem the effects of the growing cash pile if it doesn’t adjust some of the auxiliary rates it uses to help steer markets — including the zero yield it offers through its reverse repurchase agreement operations.
The benchmark that the central bank currently aims to keep within a range of naught to 0.25% — the effective fed funds rate — has remained at least 5 basis above zero in recent months, even as market rates on Treasury bills and repurchase agreements have flirted with zero, and at times gone below. That downward pressure has been fueled by the Fed’s asset-purchase program, fiscal stimulus payments to taxpayers and a drawdown of the Treasury main account related to debt-ceiling rules, among other factors.
The relative buoyancy of fed funds in this environment is, in part, a testament to the efficacy of the Fed’s reverse repurchase agreement facility. While it offers investors nothing in terms of yield right now, the facility also doesn’t whittle away their cash the way negative yields do. So in this environment, its usage has ballooned to more than half a trillion dollars. And money lodged there isn’t contributing to the supply-demand imbalance in bills and repo.
But as that facility and other instruments that yield next to nothing become bigger portions of portfolios, money-market funds may begin to feel the pinch. Taking administrative and other costs into account, some funds could begin to produce losses, which might prompt them to stop accepting new cash from investors or even close entirely. That, in turn, risks pushing even more money directly into Treasury, repo and fed funds markets — because only certain institutions have access to Fed facilities like the RRP — potentially dragging rates below the central bank’s 0% floor.
On a final note, the Producers Price Index Final Demand year-over-year rose 6.5644%
And retail sales slumped.
Jerome Powell is officially The Wizard Of Ooze.