How Inflation Is Affecting Money Market Funds –


Bank accounts are extremely safe, even if the interest most pay is very low. A survey by found that the average savings account yield in the United States was just 0.07 percent. Some online bank accounts have higher yields; in some cases, they are around 1 percent. Short-term bank certificates of deposits, Treasury bills and high-quality short-term corporate bonds are also available. All these rates are rising.

The yields paid by money market funds at the moment are below those of Treasury bills and corporate bonds or commercial paper, but with rates fluctuating, the funds have a great advantage. The fund manager can swap in higher-interest Treasury bills or commercial paper as they become available. I’m not willing to spend the time doing that myself. I’d rather let a fund manager do the work for me.

As usual, Vanguard’s fund expenses are low, which improves fund yields: The Vanguard Federal Money Market Fund has a yield of 0.72 percent. The T. Rowe Price Cash Reserves Fund, which Mr. Spratley manages, is close, at 0.66 percent. The Fidelity Money Market Fund has a yield of 0.60 percent. Virtually all major asset managers offer money market funds.

Once you start looking at them, you will find that yields are rising regularly.

Who knows where they will be next week? It is almost exciting.

Remember, though, that these yields are still extremely low. They aren’t keeping up with inflation, and if they eventually do, that’s probably not good news, either.

Imagine that in the not too distant future the Federal Reserve manages to reduce the rate of inflation close to its 2 percent target rate. To do this, though, it is slowing the economy, perhaps even tipping it into a recession. That’s no cause for celebration.

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