The Federal Reserve raised short-term interest rates for the 5th time this year and hiked by 75 basis points for the third time in a row. The Federal funds target rate is now in a range from 3.0% to 3.25%, its highest level since 2008. Money fund yields should surge in coming days and should break 2.5% on average and approach 3.0% in coming weeks. The Fed's FOMC statement says, "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures."

They write, "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective."

The FOMC adds, "In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments." (For more, see our July 28 LOTD, "Fed Hikes 75 Bps Again to 2.25-2.50%," and our June 16 News, "Fed Triples Down, Hikes by 75 bps to 1.5-1.75%."

In related news, columnist Alan Sloan writes in The Washington Post on the "'Revenge of the Savers': Fed rate rises offer a boon to the cautious." He tells us, "The Federal Reserve's four rate increases earlier this year and expectations around Wednesday's fifth increase have been major factors in sending both stocks and bonds into bear markets. However, tens of millions of people are getting a little-recognized benefit from these rate increases. I'm talking about people who own money market mutual funds, whose assets consist of high-quality, short-term IOUs from the federal government, banks and other financial institutions."

Sloan comments, "The interest that holders of these funds are getting these days is more than 100 times -- or 10,000 percent -- above what they were earning at the end of last year.... According to the Investment Company Institute, the mutual fund industry's trade organization, there are about 58 million money market mutual fund accounts, which means lots of people benefit when money fund interest yields rise, and have their income diminished when rates fall."

The Post piece continues, "Numbers from Peter Crane, whose Crane Data is the go-to source on money market funds, indicate the funds were yielding 0.02 percent at the end of last year, and had about $5 trillion of assets. Get out your calculator, multiply $5 trillion by 0.0002, and you see that the funds collectively were yielding about $1 billion a year. These days, the average yield on these funds is about 2.11 percent. Do the multiplication again, and you see that holders' annualized income is running a bit over $105 billion a year. That's more than 105 times -- call it 10,500 percent -- the year-end number."

It states, "To be sure, money fund holders aren't getting rich on their current income. But it's way above what they'd been getting. And it's going to rise more after this week's Fed increase works its way into money fund yields, a process that will take about three weeks.... Crane is projecting a 3 percent yield for money funds by mid-October and about 4 percent by year-end."

Sloan adds, "I've written numerous columns about how prudent, conservative savers were getting screwed by the Fed lowering rates to almost nothing to help bail out the imprudent and bolster the economy. Now, savers are getting a bit of their own back. Sure, I don't want to see the return of the days of double-digit money fund and Treasury bill yields, like we had in the 1980s when inflation was running wild. But it sure is nice to see tens of millions of people getting yields on safe, short-term investments that include a number to the left of the decimal point rather than looking like a rounding error."

Finally, Reuters' published the article, "Wall Street Week Ahead: Investors hide in cash despite surging inflation." It states, "A tough year in markets is leading some investors to seek refuge in cash, as they capitalize on higher interest rates and await chances to buy stocks and bonds at cheaper prices. The Federal Reserve has roiled markets in 2022 as it implements huge rate hikes in an effort to moderate the steepest inflation in 40 years. But higher rates are also translating into better rates for money market funds, which had returned virtually nothing since the pandemic began in 2020. That's made cash a more attractive hideout for investors seeking shelter from market gyrations -- even though the highest inflation in forty years has dented its appeal."

Reuters tells us, "Fund managers increased their average cash balances to 6.1% in September, the highest level in more than two decades, a widely followed survey from BofA Global Research showed. Assets in money market funds have stayed elevated since jumping after the pandemic began, coming in at $4.44 trillion as of last month, not far from their peak of $4.67 trillion in May 2020, according to Refinitiv Lipper. 'Cash is now becoming a viable asset class because of what has happened to interest rates,' said Paul Nolte of Kingsview Investment Management, who said the portfolios he manages have 10 to 15% in cash versus less than 5% typically."

The piece adds, "Meanwhile, taxable money market funds had returned 0.4% so far this year as of the end of August, according to the Crane 100 Money Fund index, an average of the 100 largest such funds. The average yield in the Crane index is 2.08%, up from 0.02% at the start of the year and the highest level since July 2019. 'They are looking better and their competition is looking worse,' said Peter Crane, president of Crane Data, which publishes the money fund index."

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