Working Paper

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

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.

JEL Classification: G11; G23; E52;

https://doi.org/10.17016/FEDS.2025.063

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2025-08-13

Number: 2025-063