Cunningham on FOMC
Federated's Debbie Cunningham, chief investment officer, Global Money Markets, commented on the Fed's recent FOMC meeting in her "Month in Cash" column, "Fed's new language a move in the right direction." She writes, "In its last meeting of 2014, the Federal Reserve's Federal Open Market Committee voted to alter the language of its closely watched policy statement, essentially subbing out the word "considerable" for "patience." The truth is that cash managers nationwide are already quite familiar with the new word. We've been patient for years now, waiting for the Fed to raise the benchmark interest rate. While we understand that the reason for the historically low federal funds rate is to stimulate the U.S. economy to recover from the financial crisis, it's been a challenge, to say the least, with yields near zero. But the change in language is a move in the right direction. Certainly, the markets reacted as if that is the case. Even as late as the fourth quarter, sentiment pointed to the first tightening being at the end of summer 2015, but now the consensus is closer to midyear. Beyond the words, the tone of the release and of Chair Janet Yellen's press conference was upbeat from a standpoint of economic recovery and sustainability." Cunningham continues, "Throughout this long stretch of near zero rates we have spent every day searching far and wide for trades that bring the best return. Lately, however, the New York Fed has been helping out through its reverse repo program. For many months, it has offered some overnight supply that gave a floor to rates of around five basis points. But in November and December it experimented with a mix of rates at different times and a term-repo offering. But what has been encouraging is that, as the Fed shifted overnight rates from three to seven, 10, and then five basis points in recent weeks, the market kept rates close to 10. It was a reflection of people squaring up for year-end ahead of time. But a large allotment of term repo ($300 billion offered in chunks over several weeks) from the New York Fed also played a major role in alleviating the constraints around supply. I think people looked at that as being a pretty significant amount of float that is still short term, maturing in early January. The overall repo market in the U.S. is about $1.6 trillion, so an additional $300 billion results in about 20% added capacity. That is definitely substantial." She concludes, "So we have attempted to reduce our dependency on overnights. Obviously, overnights are important from a liquidity perspective to meet client demands for redemptions when needed. Nonetheless, we felt there was better value out the curve and started to inch into the longer end."
