Fed Hike Still in Cards
Federated Investors' CIO of Global Money Markets, Deborah Cunningham, posted her latest "Month in Cash" commentary, "Fed Hike Still in the Cards for 2015," last week. She writes, "The equity market ended August battered by choppy waves emanating from China. Money managers didn't have to navigate those, but we had ample concerns about how the turbulence could affect the Federal Reserve's desire to raise rates for the first time in many, many years. A speech by the Fed's vice chairman at the annual Jackson Hole conference more-or-less sums up the situation. Stanley Fischer said that the case for a hike continues to grow but that volatility coming from China and other issues could impact that decision. Yet he seemed to dismiss the benign inflation readings from the summer, saying there is "good reason" to expect it to rise, and pointed to improving U.S. economic data. Regardless of his noncommittal stance and the equally noncommittal minutes of the July Federal Open Market Committee meeting, we are still of the opinion that 2015 is in the cards and that liftoff in September is more likely than in October or December. The economic statistics out between the end of July and the end of August are impossible to discount. Data has been very good, with housing and employment numbers coming in strong. The revised gross domestic product (GDP) reading for the second quarter of 3.7% was great. The only soft spot continues to be low inflation abetted by the low price of oil -- probably the biggest reason that policymakers are still on the fence. We think there's another reason that points to an imminent hike in the federal funds rate range, one that money market managers pay more attention to than most product managers. Lately, the New York Fed has been accelerating its fine tuning of repo rates, term repo and other policy tools it will be using to guide rates when they climb. The staff won't implement everything until the FOMC actually raises the target range, but it has experimented with several different strategies on money funds over the past year or so." Cunningham adds, "From a portfolio positioning perspective we decreased the weighted average maturity (WAM) target range for our government portfolios, backing-up our expectation of a Fed move. It had been in the 40-50-day range and we decreased that to 35-45 days <b:>`_. It's also a reflection of short-term rates lately being a little bit more generous then they have been. We did not take the same approach with the prime portfolios, mainly because they were already at the short end of their WAM range of 40-50 days, with most near 40 days. Plus, we have more purchasing options for prime. By the same logic we have nearly maxed-out on how many floating-rate securities we can buy (per our portfolio allocation rules), and we haven't bought many fixed-rate instruments past six months."
