Cunningham: Negative Rates Overrated
Federated Investors' CIO of Global Money Markets Deborah Cunningham writes "Market predicting instead of listening to Fed" in her latest "Month in Cash commentary. She says, "Divining the future monetary policy maneuvers of the Federal Reserve can be frustration personified, but that doesn't stop the market from trying.... But as futures go, the market's predictions for the fed funds rate are not particularly reliable. I think they are off now, and the market is underestimating the Fed's willingness to hike.... More than a few Fed officials have said not to assume the hike in December was a one-and-done move (the minutes of the January policy-setting meeting were balanced -- not dovish or hawkish). The Fed has gone to considerable length for several years now to let the market know it is data dependent and if anything, the U.S. economy has been steady to slightly positive.... I am not saying the U.S. is running on all cylinders, but we are certainly not in any way, shape or form close to a situation that would indicate negative rates. Let's not forget that the Fed is the global leader. While the world’s central banks don't have to follow it, the Fed certainly doesn't have to follow them. That divergence applies to another issue, as well—one that has also been getting much too much attention: negative rates. With the Bank of Japan's recent move to negative rates, the question was bound to be raised when Fed Chair Janet Yellen had her semiannual Humphrey-Hawkins testimony last month. While the Chair acknowledged that as a matter of prudent planning a negative rate policy could not be ruled out entirely, she did not give any indication that the Fed was contemplating such a drastic move. Yellen does not shy away from addressing issues that are concerning to the markets, so it is telling that she didn't have any mention of negative rates in her prepared remarks. The media has given this much more attention than it ever deserved." She adds, "Another reason for my confidence is more technical. As firms have been preparing for the upcoming SEC money fund rules by converting some products to government funds, there's been concern that the additional demand will drive rates negative. But a substantial portion of the shift has already occurred, and we have not seen any impact on rates. Even though the government money fund assets have passed prime money fund assets for the first time, there is plenty of supply. And just as significant, the Reverse Repo Program's floor of 25 basis points has hardly been used, and market repo rates haven't been below 30 basis points more than a handful of times this whole year. While it is good that investors and media are more engaged on monetary policy, it is unfortunate that negative rates have unnecessarily colored the discourse."
