{"id":7218,"date":"2023-09-05T22:58:09","date_gmt":"2023-09-05T22:58:09","guid":{"rendered":"https:\/\/prosfunds.com\/investing\/the-feds-rate-hikes-are-turning-money-fund-investors-into-winners-taxpayers-are-missing-out\/"},"modified":"2023-09-05T22:58:10","modified_gmt":"2023-09-05T22:58:10","slug":"the-feds-rate-hikes-are-turning-money-fund-investors-into-winners-taxpayers-are-missing-out","status":"publish","type":"post","link":"https:\/\/prosfunds.com\/?p=7218","title":{"rendered":"The Fed\u2019s Rate Hikes Are Turning Money-Fund Investors Into Winners. Taxpayers Are Missing Out."},"content":{"rendered":"

This is commentary by Allan Sloan<\/strong>, an independent business journalist and seven-time winner of the Loeb Award, business journalism\u2019s highest honor.<\/em><\/p>\n

Now that the Federal Reserve\u2019s 18 months of rate increases may finally be nearing an end, this is a good time to take a look at some of the biggest winners created by the Fed\u2019s interest-raising moves. And while we\u2019re at it, let\u2019s have some fun with numbers by revisiting some of the biggest losers. <\/p>\n

\n

The winners, of course, are people who own money-market mutual funds, whose current income is running more than 30,000%\u2014or 300 times\u2014above what it was in February 2022, the month before the Fed began raising short-term interest rates to combat inflation.<\/p>\n

The losers are the Federal Reserve\u2019s 12 regional banks, which have changed from posting big collective profits to posting big losses because of the rate increases. We dealt with this topic a few months ago, but you can bet that it\u2019s going to get lots of attention when the total losses hit the strategic $100 billion level. That is likely to happen by the end of September.<\/p>\n

It\u2019s actually pretty funny, when you step back and look at it. Here\u2019s the Fed, which is trying to tamp down inflation and slow down (but not crash) the economy, raising rates consistently for 18 months. As a result, all sorts of individual and institutional money-market fund investors have seen their income soar. But the Fed itself has been losing lots and lots of money. <\/p>\n

Before the Fed started raising rates, the regional banks were very profitable. They sent $107.4 billion of profits to the Treasury in 2021. But for reasons I\u2019ll explain in a bit, the Fed\u2019s rate increases have vaporized the Fed banks\u2019 profits, and their remittances to the Treasury this year have vanished almost entirely.<\/p>\n

Now, let me show you the money fund math. <\/p>\n

Peter Crane of Crane Data told me that as of February 2022, the average interest earned by money-market fund holders was 0.02%. The funds\u2019 assets totaled $5.009 trillion, making their interest yield about $1 billion a year.<\/p>\n

But as of July 31 of this year, Crane told me, the funds\u2019 interest yield was 5.08%, and their assets were up to $5.903 trillion. By Crane\u2019s math, the funds\u2019 yields were running at the rate of $ 299.9 billion a year. <\/p>\n

But wait, there\u2019s more. As of Aug. 18, Crane said, the funds\u2019 average yields were up to 5.15%. If we assume that assets stayed the same, which is a very conservative assumption, the funds would be yielding more than $300 billion a year to their owners. <\/p>\n

Crane cautions, however, that the $300 billion-plus is an \u201cannualized\u201d rate\u2014you take the current situation and extrapolate it for an entire year. It isn\u2019t money that fund holders have actually collected.<\/p>\n

Money fund holders\u2019 income is rising because the funds buy short-term securities, and over the past 18 months, the Fed has raised its short-term federal-funds rate to 5.25%-5.50% from essentially zero. Money fund holders\u2019 income has risen along with the Fed\u2019s rate increases. <\/p>\n

\u201cFive percent is the magic number,\u201d Crane says. \u201cIt holds psychological import, and money starts pouring into money funds at 5%. That\u2019s what happened in the late \u201990s and early 2000s, and that\u2019s what\u2019s happening now.\u201d<\/p>\n

But while money fund investors are making 30,000% more than they did before the Fed began raising rates in March of last year, the Fed itself\u2014ironically\u2014is running losses because of the rate increases.<\/p>\n

The Fed\u2019s 12 regional banks, which used to make a lot of money, are now running big collective deficits. That\u2019s because they\u2019re paying more than 5% on trillions of dollars that they\u2019ve borrowed from money-market funds and other financial institutions, while their own portfolios remain loaded with low-yielding mortgage and Treasury securities that they bought during the days of near-zero interest.<\/p>\n

The Fed banks, which for reasons we\u2019ll discuss another day have no chance of going broke, have been borrowing at high cost to keep money fund and bank assets from swamping the financial system and forcing down interest rates. If that happened, it would undermine the Fed\u2019s inflation-fighting strategy. <\/p>\n

As of June 30, what the Fed calls a \u201cdeferred asset\u201d\u2014but what I call \u201closses\u201d\u2014totaled $74.7 billion, according to the Fed\u2019s recent semiannual financial report.<\/p>\n

Stephen Church of Piscataqua Research in Portsmouth, N.H., the person who first brought the Fed banks\u2019 loss situation to my attention, says losses have been running at about $2 billion a week, totaled $77.1 billion for the year as of late August, and the trailing loss was $94.5 billion. He expects the losses to hit $100 billion in September, which I think would be a major, attention-grabbing number.<\/p>\n

The Fed banks\u2019 combined profit remittances to the Treasury through June 30 were a mere $102 million, down more than 98% from the $62.8 billion remitted through June 30 of last year, before the rate increases began to seriously affect the financial markets and the Fed banks\u2019 profits. <\/p>\n

Under the rules under which they operate, the Fed regional banks have to earn enough profits to dig themselves out of the \u201cdeferred asset\u201d hole before they can start sending serious money to the Treasury again. <\/p>\n

The Fed banks\u2019 losses don\u2019t increase federal budget deficits. But the now-vanished big profits that they used to send the Treasury did help hold down the deficit, which is $1.6 trillion so far this fiscal year. That could be an issue at a time when taxpayers are getting worried about rising government debt. And politicians might see these losses as a reason to add to their criticisms of the Fed, which are pretty loud already.<\/p>\n

In other words, money fund investors\u2019 gains are to some extent the Fed\u2019s\u2014and the Treasury\u2019s and U.S. taxpayers\u2019\u2014losses. <\/p>\n

I don\u2019t know what the future holds for money fund investors\u2014no one does. But for now, they are profiting substantially from the Fed\u2019s rate increases. And are likely to stay big winners for at least the immediate future.<\/p>\n

So if you have substantial money-market mutual fund accounts, it\u2019s time to be happy. Enjoy it while you can.<\/p>\n

Write to ideas@barrons.com<\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

This is commentary by Allan Sloan, an independent business journalist and seven-time winner of the Loeb Award, business journalism\u2019s highest honor. Now that the Federal Reserve\u2019s 18 months of rate increases may finally be nearing an end, this is a good time to take a look at some of the biggest winners created by the […]<\/p>\n","protected":false},"author":1,"featured_media":7219,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[32],"tags":[],"class_list":{"0":"post-7218","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-investing"},"yoast_head":"\nThe Fed\u2019s Rate Hikes Are Turning Money-Fund Investors Into Winners. 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