Federated on Fighting with Fed
Federated Hermes' Deborah Cunningham writes on "Fighting the Fed" in her latest monthly commentary. She tells us, "The stakes are high, but it was hard to resist eating popcorn while watching the Federal Reserve and the federal government square off last month. The main card featured Treasury Secretary Steven Mnuchin, who informed the Fed that the Treasury Department would let most of the emergency lending facilities expire at the end of the year. Hours after that news, the Fed issued a rare public rebuke of the administration, arguing that the programs provide crucial support for an economy still struggling to recover." Cunningham continues, "The fisticuffs concerned the more prominent -- and politically charged -- special purpose vehicles (SPVs) including the Main Street Lending Program and the Municipal Liquidity Facility. In contrast, the Treasury seems to understand the importance of the Commercial Paper Funding Facility and the Money Market Liquidity Facility and actually asked the Fed to extend them through March 31, 2021 (which the central bank did yesterday). Even though these SPVs have seen little use since last March, their mere existence has instilled confidence in the liquidity sector. Allow me to say again that these facilities and other Fed moves in the depth of the crisis targeted the broad secondary markets, not just money funds." The Federated Hermes Global Liquidity CIO adds, "Clouded in the dustup is how well the liquidity sector performed in November. Between the protracted results of the election and the surge in Covid-19 cases, uncertainty abounded, leading to some concern that the money markets would react adversely to it. Instead, they shrugged it off. Liquidity was abundant, yields spreads over corresponding Treasuries continued and outflows were in line with expectations. Attention now turns to year-end activity, but the moderate stress that can arise at this time seems quaint compared to what we endured this year -- and certainly when measured against pressure in Washington."
