Patrick Harker, Speech: Interesting Times
“Now, I’m certain you’re eager to grill me, but I want to close with a few words on what happened with money market funds (MMFs) almost exactly two years ago, just as the pandemic struck. I realize this is not a happy memory, so apologies for bringing this up. COVID-19 may have been a true black swan event — and we all fervently hope, a truly once-in-a-lifetime experience — but that must not preclude us from drawing lessons that we can use going forward.”
“March 2020, you’ll recall, was characterized by a dash for cash. (It was also characterized by a dash for toilet paper and hand sanitizer, but that is a story for another day.) Net outflows from prime MMFs, which provide crucial investment in various forms of short-term debt, was more than 17 percent — roughly equivalent to the outflows experienced during the 2008 financial crisis. All told, more than $140 billion evaporated from domestic MMFs between March 6 and March 26, 2020.”
“As you can imagine, this run on MMFs imposed huge pressure on the kinds of short-term funding that companies rely on to stay afloat. The consequences for financial stability, and the U.S. economy at large, were profound.”
“So, for the second time in 12 years, a significant outflow from MMFs ensured a concerted policy response. The Fed, in conjunction with the Treasury Department, stepped in, and on March 18, 2020, we announced we were launching the Money Market Mutual Fund Liquidity Facility, which was formally initiated on March 23. Ultimately, 47 out of 95 domestic prime MMFs accessed the facility.”
“What’s important to note is that as soon as we announced the advent of the liquidity fund, outflows from MMFs declined substantially. From March 23 to the end of the month, outflows were $28 billion, and by April, these funds were actually seeing inflows. Correlation is not causation, of course, so we can’t be sure it was solely the Money Market Mutual Fund Liquidity Facility that provided this stabilization, though researchers at the New York Fed have found compelling data that suggest it did have an effect.”