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

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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.

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  • Samin Abdullah & Manjola Tase, 2025. "Policy Rate Uncertainty and Money Market Funds (MMF) Portfolio Allocations," Finance and Economics Discussion Series 2025-063, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2025-63
    DOI: 10.17016/FEDS.2025.063
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    1. Bo Young Chang & Bruno Feunou, 2013. "Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility," Staff Working Papers 13-37, Bank of Canada.
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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