Policy Rate Uncertainty and Money Market Funds (MMF) Portfolio Allocations

Samin Abdullah and Manjola Tase
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Manjola Tase: https://www.federalreserve.gov/econres/manjola-tase.htm

No 2025-063, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We find that an increase in policy rate uncertainty is associated with an increase in MMF portfolio allocations towards assets with shorter-dated maturities. We also find that the direction of uncertainty matters: MMF portfolio maturity is more sensitive to uncertainty when it relates to changes in expectations for a larger increase or a smaller decrease in the policy rate than when it relates to changes in expectations for a smaller increase or a larger decrease in the policy rate. Furthermore, for MMF that are eligible to participate at the Federal Reserve's Overnight Reverse Repurchase Agreement (ON RRP) facility, we find that when policy rate uncertainty increases, MMF adjust their portfolio composition by increasing their take-up at the facility. This suggests that the ON RRP facility helps smooth fluctuations in short-term funding markets.

Keywords: Money market funds; Portfolio allocations; Monetary policy expectations; Uncertainty; Federal Reserve; ON RRP (search for similar items in EconPapers)
JEL-codes: E52 G11 G23 (search for similar items in EconPapers)
Pages: 38 p.
Date: 2025-08-13
New Economics Papers: this item is included in nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-63

DOI: 10.17016/FEDS.2025.063

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