Money market funds attract investors and reduce inflation

The economies of the world’s countries are witnessing a variable and noticeable increase in the inflation rate, as a result of the repercussions of the outbreak of the Corona virus pandemic, which in turn has caused major closures over the past two years, leading to has put a lot of pressure on production operations and hampers distribution chains worldwide.

Russia’s invasion of Ukraine has also led to an increase in oil and fuel prices worldwide, reflected in consumer price indicators, and the decline in money and cryptocurrency markets, and has called on the US Federal Reserve to by introducing a “deflationary monetary policy”. this includes an increase in interest rates on the dollar to curb inflation. .

money market funds

Experts believe that current inflation rates, followed by an increase in the interest rate, are reflected in the returns of money market funds, which is a positive aspect for people who need a temporary place to invest their money, especially in the beginning. of mutual funds in the US money markets to pay little interest.

Analysts say that these funds are considered a suitable place for both individual investors and large institutions, to keep money temporarily, as their returns for years are very low, and have approached (zero) since March 2020, and to investors almost nothing did not pay. , but the situation is currently changing.

Fund returns

After the Federal Reserve began raising short-term interest rates, returns on money market funds available to investors rose, and will continue to rise as long as the Federal Reserve continues to raise short-term interest rates.

The director of cash management in the company «T. Row Price Investments, Doug Spratly, the high interest rate on the fund returns for some time. He said: “It will rise fairly quickly, but it will not reach the rate it reached in the early eighties, to more than 15%, to match the inflation rate.”

Peter Crane, president of Crane Data, which monitors money market funds in the US state of Massachusetts, in turn said that “the return on the average large money market fund is still only 0.6%.”

He added that “income is moving in the right direction, but not much, especially when you consider inflation rates.”

treasury effects

The New York Times reported that short-term treasuries currently offer yields in the range of 0.85 to 1.05%, which is a practical ceiling, especially for funds holding government bonds.

The rise in short-term interest rates has eased inflation, as money market funds’ prices depend on the inflation rate and the Federal Reserve’s response to it.

Practically speaking, in the current volatile markets, many people need good places to keep their short-term money. In the past, many options were mentioned, such as bank accounts and treasury bills, but money market funds can now be added to that list.

safe

A money market fund is a type of mutual fund that invests only in highly liquid instruments, such as cash, cash equivalent securities, and debt-based securities with high credit ratings, short-term maturities, and offers high liquidity with a very low level of risk.

“At this point, I think money market funds are as safe as anything else,” Peter Crane said, noting that the chances of losing money in a money market fund are low.

other options

There are other options to keep short-term money safe. This includes Level 1 US government bonds, which yield 9.62%, a rate that is reset every six months. It is very safe but imperfect, especially for short term purposes.

There are many secure bank accounts, even if the interest rate you pay the most for is low. Analysts have said that the returns that money market funds pay are currently lower than the returns on treasury bills, corporate bonds or trading paper, but with price volatility, the funds have a significant advantage.

Purchasing power

Inflation is the loss of purchasing power over time, and is expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transportation and toys. Inflation occurs due to increased consumer demand, or based on developments unrelated to economic conditions, such as oil prices and supply chain problems.

Rapid price increases create challenges, but moderate price increases can lead to higher wages and job growth, and rapid inflation also causes problems for equities, as financial assets generally perform poorly during periods of inflation, while tangible assets such as homes retain their value Better.

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