Federal involvement in the money markets has become a constant thing. Since the 2020 crisis, money market funds have increasingly relied on a Fed backstop — the reverse repurchase agreement operations, or “reverse repo,” of the Federal Reserve Bank of New York. Most of the holdings of many money market funds are Treasury securities sold overnight by the Fed. In total, more than $2.2 trillion in securities are tied up in this market.
On March 30, in the midst of the latest banking crisis, Treasury Secretary Janet L. Yellen targeted money market funds as an area of special concern. “If there is any place where the vulnerabilities of the system to runs and fire sales have been clear-cut, it is money market funds,” she said. “These funds are widely used by retail and institutional investors for cash management; they provide a close substitute for bank deposits.”
While noting the regulatory tightening that had already occurred, Ms. Yellen said that much more needed to be done. “The financial stability risks posed by money market and open-end funds have not been sufficiently addressed,” she said.
How to Use Them
These days, I have a variety of places to stash the cash I’ll need to pay the bills.
These include accounts at a major global commercial bank, a credit union, an online high yield F.D.I.C.-insured savings bank and a low-fee money-market fund with a large, reputable asset management company. Over the past year or two, I’ve kept some money in all of these, though the money market fund has become my favorite lately, because it generates steady cash.
But when the Fed drives interest rates back down — that could happen soon if there’s a recession, or many months from now, if inflation is persistent — money-market fund rates will drop, too, and I’ll reduce my holdings in them.
I’m also aware of the potential perils associated with money market funds. To minimize risk, I use a so-called government fund — one that holds only Treasury bills, other securities of the U.S. government and of U.S. agencies, and reverse repo securities at the Fed. That eliminates the possibility that my fund will hold securities issued by a private company that goes belly up — as Lehman Brothers did in 2008, causing trouble for some money market funds.
Of course, Treasury bills aren’t 100 percent safe either, not with the federal debt ceiling looming. Mind-boggling as this may be, it is possible that the U.S. government could default on its debt. Many money market funds are avoiding Treasury bills that could come due during a debt ceiling stalemate.
Jeff Sommer
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