How Inflation Is Affecting Money Market Funds

A place for cash

As a practical matter, in the current unsettled markets, many people need good places to keep their short-term cash. In the past, I noted that several options — like bank accounts and Treasury bills — seemed reasonable. Now I would add money market funds to that list, with some qualifications.

Be aware that, yields aside, money market funds ran into some safety problems in the last two financial crises. Since then, they have been subjected to tighter regulatory scrutiny and to a series of reforms.

Many funds now hold only U.S. government securities, and all are required to hold only high-quality debt instruments. All are intended to avoid fluctuations in value, though they have come under strain before and could well do so again. In any case, money market funds are safer than bond or stock mutual funds or exchange-traded funds.

I asked Mr. Crane, who has closely monitored money market funds for decades, whether he recommends them.

“At this point, I think they’re as safe as just about anything,” he said, but added that bank accounts with government insurance “have a slight safety edge.” Still, he said, if we are ever “in a situation where money funds are losing deep value, you will have a lot of other problems to worry about, like finding your hip waders and making sure you have enough canned food.”

I would put it this way: The odds of losing money in a money market fund are low. In another major financial crisis, it is quite possible that they could run into problems again, but the government has always stepped in to fix them.

Article source: https://www.nytimes.com/2022/06/10/business/inflation-money-market-funds-rates.html