Cunningham on Fed Rate Kickoff
Federated Investors' Global Money Market CIO Debbie Cunningham posted her December "Month in Cash" commentary, entitled, "Finally time to kick rates off the ground." She writes, "This year marks the 50th anniversary of the beloved TV special, "A Charlie Brown Christmas." But for cash managers, the more apt Peanuts reference is Lucy pulling that football at the last second when Charlie Brown runs to kick it. Federal Reserve Chair Janet Yellen has played her best Lucy impression by postponing an expected liftoff several times already this year. We -- and the majority of the market -- think the Fed will raise rates in its December policy-making meeting. A data-dependent Fed will likely find current economic numbers acceptable when it meets Dec. 15-16 even if inflation continues to be low. The labor market has been strong and even the softening in the residential housing has been offset somewhat by corporate sales. Of course, geopolitical violence could derail a hike if everyone responds to it by staying home to watch CNN instead of shopping or eating out. The Fed is concerned about negative externalities and is assessing all avenues, but most lead to a hike. If that does occur, some have raised concerns about whether rates on money market securities will follow suit given the extreme demand for these types of securities. We believe the Fed's monetary policy tool of the overnight reverse repo facility will not only continue to be effective at establishing a floor under short-term interest rates but also provide adequate supply for those with which it trades. The New York Fed holds over $2.5 trillion of Treasury securities on its balance sheet that it can make available for reverse-repo transactions with approved counterparties, of which we are one. This gives eligible participants a place to invest if traditional markets appear too expensive. We have already seen an increase in the London interbank offered rate (Libor) over the course of November in anticipation of the Fed move. But the flip side is you won't see the whole curve shift up by 25 basis points if the Fed moves to a 25-50 basis-point target range because it is already 75% of the way there.... It's important to realize that different money funds in the marketplace have different composition and so may adjust to the rate hikes at different speeds. The higher overnight positions in government funds may mean that these funds adjust more quickly. Municipals would be next because of their use of 7-day variable rate demand notes (VRDNs) -- within a week they should catch up to the direct market. Prime funds would be third, lagging around one-to-two months because they don't have as much in the overnight or 7-day spaces. In preparation, we continue to have shorter Weighted Average Maturity (WAM), down in the mid to high 30s for the most part, high percentages of floating rate securities and an ample amount of liquidity."
