Cunningham: Yellen Cages Hawks
Federated Investors' CIO of Global Money Markets Deborah Cunningham writes in her April "Month in Cash" column, entitled, "Yellen Cages the Hawks," "It was no surprise that the Federal Open Market Committee (FOMC) did not raise rates at its mid-month meeting, in the process dialing back the projections for hikes this year.... Why then did several Fed officials start emitting hawkish screeches not long after the meeting concluded" A string of speeches suggesting the economy is looking good enough for policy action was enough to build in at least the probability of a move at the April meeting from a federal funds futures perspective, and definitely put June in play. That turned out to be fleeting as Chair Janet Yellen dismissed the hawkish tone in her own dovish speech at the end of the month at the Economic Club of New York. Her words quickly pushed market expectations out at least until September, which is unfortunate because I think we are on track and the target of June for the next hike is realistic. So far, Yellen has been a consensus builder behind the scenes, but here seemed to be a public rebuke to some members, including St. Louis Fed's James Bullard. Perhaps the bigger question is why Yellen would be against a hike when she herself has referred to them at this point as normalization, not tightening? In a sense, the offsetting domestic data makes the case for continued normalizing.... Yellen has tried to be a shepherd of the economy so far in her tenure, but this month she turned more to herding. While the clock is paused on rate hikes, it is ticking loudly toward the implementation of the SEC money market reforms in fall. We've seen action by some fund families to convert prime money market funds into government funds. But direct investors seem to be taking their time to make a decision, choosing to stay where they are and not move to different products despite the impending regulations. Spreads have widened between prime and government instruments, and that may yet prove to convince institutional investors to stay in the prime space in spite of floating NAVs and gates and fees. We will obviously not know until closer to October. The Fed drama and the plateauing of the London interbank offered rate (Libor) has led us to keep our weighted average maturities short, with WAM for prime portfolios in a 30-40 day range and government portfolios in a range five days further out. We have been buying more in the 3-6 month area for institutional products, not wanting to take the risk with longer-dated securities." In other news, BlackRock unveiled its "Cash Academy," the first lesson of which features commentary from MD & PM Rich Mejzak on "Adapting Investment Policy Statements for Money Market Fund Reform." (We mentioned their new white paper, "Insights to Act On: Adapting Cash Investment Policies for Money Market Reform," in a previous "News".)
