Drowning in Cash, Money Markets Seek Another Life Raft From Fed

More and more, investors are wondering whether the Federal Reserve will tweak its monetary policy toolkit to help out money markets that are starting to drown in a sea of cash.

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.

“There comes a point where zero becomes too much,” said Teresa Ho, a strategist at JPMorgan Chase & Co. “Zero is great when you’re in a crisis, but when it comes to the weight of zero basis points, it’s quite heavy for the front end.”

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 points 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.