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Fed official warns on rush to 'government-only' U.S. money funds

Section: Daily Dispatches

By Jonathan Spicer
Monday, February 22, 2016

NEW YORK -- The Federal Reserve's top markets official warned on Monday that a trend of U.S. money market firms converting funds from "prime" to "government-only" could be sharply reversed and harm the overall execution of policy when a new Fed tool is eventually dismantled.

In a speech on tools the U.S. central bank adopted to wrench interest rates from near zero in December, New York Fed markets chief Simon Potter warned money funds that one of those tools, an overnight repurchase facility known as ON RRP, is only temporary.

More than 100 funds have access to this facility that provides a short-term yield of 0.25 percent on cash. Many of them have begun in recent months to make the conversion from prime, which invests in a wide range of securities, to the narrower government-only structure ahead of an October deadline by the Securities and Exchange Commission for new controls on client redemptions in prime funds.

But if assets were to "grow significantly" in government-only funds, that could increase demand on the repo facility (ON RRP) since "most fund managers consider the facility to be a government investment," Potter said.

"We would not want to see growth in government-only money funds if it were predicated on a mistaken impression that ON RRP would be around indefinitely and with high capacity," he said. If the funds were to realize their error and "decline sharply, this could possibly lead to less efficient transmission of monetary policy." ...

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