Wells Asks: Will They or Won't They?
Wells Fargo Money Market Funds' posted its latest "Portfolio Management Commentary," which says, "Will the Federal Reserve (Fed) raise rates -- that is the question that had seemingly been answered during the first part of August with a resounding "yes they will raise rates in September." Gross domestic product was revised higher at the end of July, the employment number announced at the beginning of August showed continued strength, and consumer sentiment rose. The probability of a move in September crept above 50% for the first time on August 6, as calculated from futures prices. As we get closer to the September 17 meeting, the off/on switch of will-they-or-won't-they is getting more sensitive. By mid-August, it switched to off again, with the probability dropping below 30% by the end of the month. Oil prices took another dip down (not helping inflation move toward the Fed's 2% objective) and emerging markets equity volatility spilled over to developed markets.... Market pundits have been almost exclusively focused on a move in either September or December because both of those FOMC meetings have a press conference scheduled after the conclusion of the meeting. But there is also a meeting in October, and in response to an earlier press conference question, Fed Chair Yellen said the committee can call a press conference at any time if necessary. So, October should not be dismissed as an opportunity for the Fed to implement liftoff of its target rates." The piece continues, "It is not our strategy to position our portfolios to time possible interest-rate changes; rather, we focus on ensuring that we are adequately compensated for investments in any tenor we select. Consequently, our focus on preservation of capital by investing in high-quality securities and maintaining a high degree of liquidity is unchanged. We believe we are properly positioned to adjust quickly to changing market conditions as well as maintain our commitment to our twin objectives of liquidity and stability of principal." Wells adds, "Planning in our industry continues as each month progresses and we get closer to implementing the SEC's money market reforms, the bulk of which will take effect October 2016. As we get close to the implementation date, we expect to see a further shortening in the weighted average maturities of prime money market funds and more demand for government securities; this combination should prove to be interesting when the time comes for the Fed to raise rates because it will be a real test to see how well it will be able to control short-term rates. The federal funds futures rate tells us that there is over a 40% chance of a Fed hike in October and well over 50% by the end of December, so the market is anticipating one move by year-end. But, as we have seen, the markets have been wrong before. Stay tuned for further developments."
