Cunningham: Times Have Changed
Federated Investors' CIO of Global Money Markets, Deborah Cunningham writes in her latest "Month in Cash" "How times have changed." She says, "The incessant buzz surrounding whether the Federal Reserve will or won't initiate liftoff in September (put me in the "will" camp) got me thinking about just how much times have changed. I can recall a meeting years ago in the board room on the 27th floor of our Downtown office building. It was with members of the New York Federal Reserve Bank, and the discussion centered on the possibility the target funds rate, 1% at the time, could be lowered another 25 basis points to 0.75% ... 0.75%! We thought that was madness; now, we'd be jumping for joy over such a rate! And, frankly, we believe we will get to 0.75% at some point next year, likely in the first half of 2016. We also think the Fed will initiate its first increase in the funds rate in nine years at its meeting next month, the noise surrounding its late July post-meeting statement notwithstanding. If you strip that statement down, there were less than 10 word changes, with a lot of consternation focused on the addition of the word "some," as in policymakers to need to see "some" further improvement in the labor markets to justify a rate hike. Honestly, this all sounds like word sniffing to me." Cunningham continues, "We do think the Fed will tread very gingerly once it begins to move. Our scenario sees a rate hike of 25 basis points or so every second or third meeting, starting with September as opposed to December, as some are currently suggesting. Given the cash-flow complications and all the funding and window-dressing moves that occur in the money market toward the end of every year, to toss in the beginning of a policy of raising rates when they've effectively been a zero for seven years wouldn't make a lot of sense from our perspective. That said, we wouldn't be surprised if the Fed only makes one move this year; its first meeting in 2016 is in late January, so skipping December wouldn't be such a big deal. Our expectation is the Fed will nudge the target rate to 1% and then pause to make an assessment.... With the cash market starting to price in a move, we've been able to find value in floaters -- floating-rate instruments that reset periodically and generally benefit in a rising-rate environment -- and further out on the cash yield curve. This has resulted in unique circumstance in our portfolios -- the weighted average life of our holdings has extended by about 10 days over the past month as we moved out on the curve, but the weighted average maturity hasn't budged, reflecting a big increase in holdings of floaters that reset monthly." In other news, StoneCastle Cash Management, which "amalgamates" FDIC insured deposits, issued a press release saying it posted record asset and account levels in 2Q. Business highlights include: "Increasing balances by 20% year to date, with FICA and ICA balances up over 30%; Exceeding 1,000 total institutional accounts; Successfully launching the new Institutional Cash Account, a non-insured, large balance bank deposit solution. "It is not coincidental that as firms deal with the impact of regulatory reform, SCCM and its FICA offering are reaching historic asset levels. We continue to see strong growth in assets as treasurers seek out proven cash management solutions," said StoneCastle's Brandon Semilof.
