Money market mutual funds earn the highest interest rates in decades, making them an increasingly attractive option for investors seeking higher yields with relatively low risk.
Savers reap the benefits of high returns on money market funds – which typically contain lower-risk investments such as government bonds and some types of corporate bonds that offer investors lower-risk alternatives than what they would see in equities. Money markets are often treated similarly to savings accounts in that they provide investors with a relatively safe and liquid way to store their money.
Money market funds pay an average interest rate of 5.15%, according to Crane Data, the highest level since 1999 and comes after money market returns have typically been much lower over the past two decades.
a Wall Street Journal analysis of the Crane 100 Money Fund Index, which is based on an average of the 100 largest taxable money market funds, found that money market yields last reached 5% in 2008 before falling to near zero over the following two years as the financial crisis economy. Money market yields remained close to zero until 2016, when they began to rise steadily to over 2% in 2019, before falling to near zero during the COVID pandemic.
FED OFFICIALS SEE CONTINUING INFLATION RISKS THAT MAY REQUIRE MORE COST INCREASE, MINUTES SHOW
As inflation in the US economy soared in 2022 due to high government spending and pandemic-related supply chain disruptions, the Federal Reserve launched a campaign of rate hikes to stabilize consumer prices by curbing inflation. That resulted in higher yields on US Treasuries and, in turn, money markets.
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With money market funds returning high returns, investors have sought to move their money into the money markets to ensure returns that sustain their purchasing power by beating inflation – which has so far remained above the Fed’s target of 2% and came in at 3.2% on an annual basis from July.
Total money market fund assets have risen steadily in 2023, reaching a new all-time high of $5.57 trillion for the week ending Aug. 16, after investors deposited nearly $40 billion in money markets, according to data from the Investment Company Institute. Those numbers include more than $2 trillion in retail money markets and nearly $3.5 trillion in institutional accounts.
AMERICANS’ WATCHING PANDEMIC SAVINGS MAY DOWN THE CHANCE OF A SOFT LANDING FOR THE US ECONOMY
Federal Reserve Chairman Jerome Powell will speak this Friday at the annual Jackson Hole Economic Symposium in Wyoming, which will be closely watched for insights into the Fed’s approach to further rate hikes leading up to the Federal Open Market Committee’s next meeting in mid-September .
In the minutes of the Fed meeting in Julypolicymakers noted: “With inflation still well above the Committee’s long-term target and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”
FED HIGHES INTEREST RATE TO 22-YEAR HIGH IF INFLATION STRUGGRES RESUME
At the most recent meeting, Fed officials agreed to raise interest rates for the 11th time in 16 months with a quarter percentage point increase to a 22-year high of 5.25% to 5.5%. Persistent concerns about stubborn inflation could lead to one or more additional rate hikes to curb it.
Powell told reporters after the meeting: “We again intend to keep policy restrictive until we are confident that inflation will fall sustainably to our target of 2%, and we are ready to tighten further if necessary. “
If the Fed opts for one or more additional increases in the benchmark federal funds rate, it could result money market returns higher given the extent to which they are composed of government bonds that are influenced by benchmark interest rates.
Megan Henney of FOX Business contributed to this report.
