Cunningham: Pleasant Fed Surprise
Debbie Cunningham, CIO of Global Money Markets at Federated Investors, writes in her November "Month in Cash" commentary, "Pleasant Surprises from the Fed," "If the recent Federal Reserve policy statement tells you anything, it's that no one can predict with certainty what the policymakers will do. Last year the Ben Bernanke-led Fed stunned the market by not beginning to taper the amount of assets it was buying monthly, known as quantitative easing (QE). Last week came another surprise -- although, thankfully, a positive one. The consensus was that little news would come from the Federal Open Market Committee (FOMC) meeting at the end of the month: it would stay the course, end QE and retain dovish language in regard to when it will raise the federal funds rate. If anything, we thought there might be a surprise to the downside. But instead the statement defied expectations by taking a more hawkish tone.... But just when it seemed Chair Janet Yellen had indeed traded soft coos for sharp talons, the rest of the statement was hedge after hedge! First came the announcement that if labor and inflation data disappoints, the FOMC won't hesitate from holding off on a rate liftoff. And then came a warning that even when the dual mandate data gives the go signal, it will likely keep the red light on: "economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." So in the end, we are back in the same place: waiting for rates to rise. On the RRP changes, Cunningham said, "`Business is not back to usual for cash management, however. The New York Fed again altered the rules for its overnight Reverse Repo Program. Despite the breakdown at September quarter end due to its imposing of a new $300 billion cap, the cap remains. Yet this time, the Fed is trying to encourage higher bids by showing it will offer higher rates, but in a controlled and obtuse way. For instance, it will offer seven basis points from Nov. 17-28 and ten basis points from Dec. 1-12. And the bank introduced an additional $300 billion of term repo to be offered in January. We understand the Fed's overall reason for the RRP and term repo -- as additional tools to support the fed funds rate, especially in window dressing scenarios -- and we appreciate that Yellen is trying to put a floor on rates. But as to why it had to be orchestrated in such a complex way is not, well, clear. The end of QE won't add much supply to the market -- $15 billion helps, but not overly so -- and Libor didn't budge, so neither did our investment strategy. We again stayed mostly in the six-month maturity range, grabbing floaters when we could, and weighted average maturity for government bonds at 45-55 and asset-backed at 40-50."
