Changing the game plan

The September FOMC meeting was the latest case of the Federal Reserve moving its policy goal posts. (It’s college football season, so allow me some analogies!) In their new Summary of Economic Projections (SEP), policymakers yet again increased the level they think the fed funds rate will reach in the near future. Their median projections rose by 50 basis points from June’s forecast to 5.1% and 3.9% in 2024 and 2025, respectively. It’s another in a string of dot-plot increases since they finally got serious about inflation roughly two years ago.

It's understandable policymakers wanted to avoid shocking the markets with predictions that rates would have to surge to tackle inflation. But this “three yards and a cloud of dust” approach has confused investors and traders, leading them to doubt the Fed one month and believe it the next. It has happened again following the September meeting. Despite the new dot plot indicating FOMC members expect to raise the target range by another 25 basis points this year, Treasuries futures have priced in a pause in November, with cuts to follow in the mid 2024.

While rising rates tend to benefit liquidity products, the ever-shifting SEP has often blocked entire sections of the Treasury yield curve from useful trading. That's occurring now. If you believe, as we do, that rates will climb further, value is hard to find along the yield curve. In particular, it has been difficult to find worthwhile trades for securities maturing longer than three months. The yields are simply not high enough. Thankfully, the various prime curves have tracked the Fed better, one of the reasons for the continuing flows into retail prime funds.

We are inclined to accept the Fed’s message of high-for-longer. A month’s worth of data could change our minds. But at present, we expect a quarter-point hike in November and don’t envision easing to take place until 2025, or late 2024 at the earliest. The U.S. economy has been exhibiting signs of slowing but not of rolling over. Consumers and workers remain in positions of strength, and goods and services sectors are hanging in there. Inflation is falling, but the closer you get to the endzone, the harder it is to advance. The game is far from over.

Money markets funds free at last

We have been celebrating for two months, but today is the first without the two SEC rules from 2014 that caused so much damage to the money fund industry. The new regulations passed in July removed the potential imposition for redemption gates, as well as the link between weekly liquid assets and potential fees on prime and municipal money market funds. We continue to anticipate retail clients and sweep accounts will return to these products for their attractive yield potential and other advantages.