Federated Hermes writes about the Fed's latest "taper" in "A familiar course," its latest monthly commentary. Money Market CIO Deborah Cunningham comments, "The success of the Fed's first taper gives us confidence it will work well again. 2013 seems so long ago.... But many are recalling it now that it's soon likely to happen again -- potentially following this week's Federal Open Market Committee meeting. For his part, Chair Jerome Powell said on Oct. 22 that, 'I do think it's time to taper.' It's helpful to recall 2013 because the process went smoothly (the taper tantrum happened earlier in the year). We expect the same outcome this time. And we anticipate the deliberate, orderly process will benefit the money markets at a similar pace."
She explains, "While the Treasury market probably won't budge from its low levels for some time -- Powell also said, 'I don't think it's time to raise rates' -- spreads in the prime space have been widening. (This is being seen in the Bloomberg Short-Term Bank Yield Index, or BSBY -- the industry replacement for the London interbank offered rate.) We believe the steepening at the short end is due to how prime money funds and the like continue to show resilience in the face of uncertain market conditions. We think BSBY yields will continue in that positive direction."
Cunningham adds, "Even regulations on the money market fund front seem to be taking a good turn. The case for delinking liquidity thresholds and fees/gates has gained support by the majority of industry participants and we think also by some regulators. That the ultimate authority on this, the SEC, has put reform on the back burner, behind issues like responsible investing disclosures, indicates it may be considering more modest measures. We still argue for an industry-wide standing facility or something similar, rather than regulation targeting money funds, because the crisis in 2020 affected the broad liquidity market."
In related news, yesterday's "FOMC statement" says, "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the summer's rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."
It tells us, "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved."
The FOMC update continues, "The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In light of the substantial further progress the economy has made toward the Committee's goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities."
They state, "Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook. The Federal Reserve's ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses."
The statement adds, "In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
In other news, a press release entitled, "Fitch Ratings Updates Global Money Market Fund Rating Criteria; Ratings Unaffected," tells us, "Fitch Ratings has published an updated version of its 'Money Market Fund Rating Criteria.' This criteria updates Fitch's criteria of the same title published on 23 April 2020. The changes to the criteria are limited, reflecting certain market developments and clarifying some aspects of criteria application. No rating changes are expected. This global criteria report primarily focuses on the key rating considerations when assessing the capacity of money market funds (MMFs), or other liquidity- or cash-management products, to preserve principal and provide liquidity."
It states, "The criteria's emphasis is on managers' ability to avoid losses through limiting credit, market and liquidity risks rather than the particular accounting convention used to calculate net asset value (NAV), and therefore the criteria is applicable to constant, variable and floating NAV funds, as well as European low-volatility NAV funds. The criteria is also applicable to other liquidity- or cash-management products such as local government investment pools (LGIPs), separately managed accounts, private funds, or other similar vehicles that have comparable investment objectives and operating frameworks to MMFs."
Fitch's changes to its criteria include: "Added consideration of deposit programs sponsored by certain U.S. states, which some LGIPs invest in. The programs' credit quality will be assessed based on the terms of the specific program. In the case of joint and several guarantees, Fitch will impute a rating for the program based on the ratings of the two highest-rated banks participating in the program. Credit afforded to such deposit programs is limited to 25% of a fund's assets; Increased the direct exposure limit for repurchase agreements (repo) conducted through the Fixed Income Clearing Corporation to 75% from 25%; and, Clarified that the credit treatment of FDIC insured deposits with unrated or low rated banks will be consistent with the U.S. government's rating. In terms of Fitch's liquidity assessment, Fitch will count these deposits towards weekly liquidity if they are redeemable within a week, while for daily liquidity Fitch will only count a portion of these deposits if they are redeemable daily."
Additional changes to criteria include: "Clarified that Fitch's credit stress tests performed for MMFs during the rating process include ongoing market or issuer-specific developments, forecasts from Fitch's Economics Group and/or additional scenarios promulgated by Fitch's Credit Policy Group. Alternatively, Fitch may assume securities or issuers on Rating Watch Negative or Rating Outlook Negative experience downgrades or develop assumed downgrade scenarios based on an individual issuer exposure. Fitch will then re-calculate the portfolio's minimum and average credit quality (PCF), taking into consideration these assumed downgrades; and, Clarified that Fitch's normal liquidity criteria will be adjusted lower for certain funds that exhibit structurally stable investor bases and historical flows. To qualify for this lower liquidity requirement, Fitch will assess a fund's track record, portfolio profile, diversification and stability of its investor base, predictability of capital flows and historically observed outflows. Fitch will determine liquidity levels based on the historical worst outflows of the fund."
Lastly, the release states, "A number of regulators across the world have put forth reform proposals for MMFs following the market volatility experienced in 2020. Depending on the impact of the final reforms on MMF features, or short-term markets more broadly, Fitch may further update its MMF rating criteria to reflect these changes." For more, see these Crane Data News pieces: "Fitch Updates MMF Ratings Criteria; Treasury Xpress Partners with FXD" (5/17/19), "Fitch Updates MMF Rating Criteria" (5/1/17), "Standard Poor's Updates Criteria for AAAm Rated MMFs; Relaxes on Repo" (2/2/16), "Fed's Z.1: Corps, Sec Lenders Rise; Fitch Updates Ratings Criteria" (12/14/15) and "Rating Agencies Discuss Trends, Concerns, Criteria at Crane Symposium" (7/23/15) and "Standard & Poor's Reviews Fund Ratings Criteria" (9/17/14).
