Northern Trust Asset Management recently published "Global Investment Outlook 2025." The section on "U.S. Money Markets," titled, "Money fund assets up while rates go down," tells us, "For 2025, there is significant uncertainty over the economic outlook and monetary policy. A fairly wide range of outcomes with respect to the federal funds target range are possible. Accordingly, we favor a neutral position for our portfolios. Importantly for money market investors, we and the markets see little chance rates return to the zero lower bound anytime soon -- a welcome change from much of the past 15 years of very low yields on cash." It explains, "While the federal funds target range is the biggest driver of money market fund yields, money markets also exhibited signs of normalization in 2024, with more rate volatility within the federal funds target range. Credit spreads were generally little changed, to slightly tighter. While participation in the Fed’s reverse repurchase agreement operations (RRP) peaked at $2.3 trillion in 2023, it has trended substantially lower to as low as $150 billion. This is a consequence of balance sheet reduction by the Fed. While money market rate volatility is normal, rates near or above the top of the target range may be a sign of reserve scarcity. The Fed's balance sheet reduction may need to end, a dynamic we'll be monitoring closely." Northern adds, "While intuition may suggest that as yields on money market funds move lower along with policy rates they would be less attractive and drive outflows, we've seen the opposite in 2024, consistent with historical experience. Money market fund industry assets have increased by more than $500 billion this year ..., setting all-time-high records. Assets have been going up even as rates are going down, as money market funds remain an attractive alternative to other cash management options like deposits or Treasury bills."
