MONEY MARKET | August 2019
Tax Exempt money market commentary
Director of Tax-Exempt
Money Market Fund Strategies,
BNY Mellon CIS
As anticipated, the Federal Reserve (the “Fed”) lowered the federal funds target range by a quarter of a point at the July 31 Federal Open Market Committee (FOMC) meeting to 2.00%-2.25%. This was the first interest-rate reduction since the global financial crisis and the committee hinted it may cut again this year to insulate the record-long U.S. economic expansion from slowing global growth. The next FOMC meeting is scheduled for September 18 and the market is anticipating an additional 25-basis-point reduction in the target rate.
Assets in tax-exempt money market funds have stabilized since the industry saw large outflows towards the end of April as payments for the 2018 tax bills came into play. Continued steady asset increases in the municipal market have kept rates on variable-rate demand notes steady during the summer months. These securities are highly liquid and are used to meet redemptions and to react to changes in the federal funds rate. (The Securities Industry and Financial Markets Association (SIFMA) Index is a weekly high grade market index comprised of seven-day, tax-exempt, variable-rate demand notes produced by Bloomberg LP.)
Strong demand plus limited supply, combined with the change in Fed policy, resulted in a downward trend in fixed-income tax-exempt yields, moving the one-year index to a 1.15% reading. Demand continues to remain strong for shorter maturities due to the continued flattening of the yield curve and the strong inflows into tax-exempt funds, particularly longer-dated portfolios.
A number of states are finalizing budgets for fiscal year 2020 as the economy remains generally strong. Spending priorities among the states include augmenting reserve funds to counter a future economic slowdown, teacher salary increases, funding pension liabilities and addressing infrastructure needs. States and municipalities are awaiting progress on a federal infrastructure program, but in the meantime are considering hikes in state gas taxes to fund serious needs.
Early concerns about personal income tax collections seem to have subsided as receipts during the final days of the tax collection season appear to have met or exceeded expectations, particularly in California, where April collections surpassed estimates.
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