Although inflation has been very low and is likely to remain low in the near term due to declining prices of oil and other commodities, Federal Reserve officials raised rates in December because of labor market improvement and their confidence that inflation will return to 2% over the medium term. The U.S. unemployment rate was 5.0% in December, down from 5.7% in January 2015. However, gross domestic product (GDP) growth remained less than impressive, as GDP expanded only 2.1% in the third quarter from the period a year earlier. Yields on three-month tax-exempt municipal debt increased marginally over the course of the quarter.
The Tax-Exempt Money Fund returned 0.01% in the quarter compared with 0.01% for the Lipper Tax-Exempt Money Market Funds Average. For the 12 months ended December 31, 2015, the fund returned 0.02% versus 0.01% for the Lipper Tax-Exempt Money Market Funds Average. The fund's average annual total returns were 0.02%, 0.01%, and 0.83% for the 1-, 5-, and 10-year periods, respectively, as of December 31, 2015. The fund's expense ratio was 0.51% as of its fiscal year ended February 28, 2015. The fund's seven-day simple annualized yield as of December 31, 2015, was 0.01%. Its seven-day simple annualized yield without waiver was −0.30%.* The fund's yield more closely reflects its current earnings than the total return.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance,
which cannot guarantee future results. Return and yield will vary.
An investment in money market funds is not insured or guaranteed by the FDIC
or any other government agency. Although the fund seeks to preserve the value
of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
*In an effort to maintain a zero or positive net yield for the fund, T. Rowe Price has voluntarily waived all or a portion of the management fee it is entitled to receive from the fund. A fee waiver has the effect of increasing the fund's net yield. The 7-day yield without waiver represents what the yield would have been if we were not waiving our management fee. This voluntary waiver is in addition to any contractual expense ratio limitation in effect for the fund and may be amended or terminated at any time without prior notice. Please see the prospectus for more details.
Even after the Fed's first rate hike since 2006, strong demand, shrinking supply, and fewer investment alternatives continued to constrain money market rates. Municipal issuers have restructured much of their borrowing to lock in favorable long-term rates and lower their exposure to short-term rate increases, which has curbed the supply of short-term munis available in the market. Additionally, the stronger economy has lifted revenue for municipalities across the U.S., lessening their short-term borrowing needs. These factors have reduced the supply of high-quality, short-dated investments. Credit quality has improved for many municipalities as revenues have picked up. We favor highly rated segments such as housing, education, and dedicated revenue bonds.
Now that the first Fed rate hike is out of the way, Fed officials are likely to take some time assessing its impact on financial markets and economic conditions. Subsequent increases are likely to occur gradually, so the Fed may wait a few months before acting again. Nevertheless, a rising federal funds rate should eventually translate into higher income for money market investors who have endured near-zero interest rates for the last seven years. As always, we remain committed to managing a high-quality, diversified portfolio focused on liquidity and stability of principal.