Some of this activity may have resulted from the passage of the TCJA’s repatriation provisions; it may also be related more generally to the recent strength of the economic expansion and the high level of consumer and business confidence. It is hard to precisely quantify the extent to which these cash shifts have affected money markets, but it seems likely at this point that they have had an effect, at least for a time. Finally, it is important to be clear that there is no evidence that bank funding stress has contributed to this recent increase in LIBOR, in contrast to rises seen during the 2007-2009 global financial crisis and 2011-2013 European sovereign debt and banking crisis. Another important consideration in the recent fluctuations in term rates is that there is an ongoing, longer-term adjustment in U.S. money markets related to the 2016 reform of money market mutual funds (money funds). The fragility of money funds—demonstrated in 2008 when a large money fund “broke the buck,” other money funds were hit by runs, and the Treasury stepped in to guarantee money fund liabilities—has been mitigated by this reform. It had the effect of sharply reducing the size of prime money funds, which have a broad capacity to invest across money markets, and increasing the size of government money funds, whose mandate is more restricted, as shown in Figure 15.
For additional discussion, see “Domestic Open Market Operations During 2017,” a report prepared by the Markets Group of the New York Fed for the FOMC. 13  4  the FOMC’s future policy stance are properly incorporated into the term structure of interest rates, and thereby appropriately affect financial conditions and the broader economy. To address the rise, the Federal Reserve made a technical adjustment to the IOR rate at the June FOMC meeting, raising it by 20 basis points while increasing the target range by 25 basis points. 14 The technical adjustment worked exactly as we expected. As you can see back in Figure 2, all rates paid on federal funds borrowings, as well as in other money markets, rose by about 20 basis points. This made it less likely that the effective federal funds rate would be above the top of the target range. Let’s spend a few minutes exploring what drivers might have been most significant in bringing about the rise in money market rates relative to IOR. 15 Leading into the technical adjustment, a shift in flows in the Treasury market had the effect of pushing both Treasury bill yields and repo rates higher in February and March. Figure 6 shows cumulative net Treasury bill issuance since the beginning of last year, as well as projections through the third quarter of this year as reported by a private-sector forecaster.