Cunningham on Rates, Regulations
Federated Hermes' Deborah Cunningham titled her latest monthly commentary, "Onward and upward: Three things to watch in 2022." She tells us, "If the Federal Reserve abides by its own projections for 2022, it will be the latest multi-billionaire to liftoff. While Covid threatens to delay that launch, the reduction of accommodation is the most prominent of our three key things to watch in liquidity this year." Cunningham comments, "Desiring to communicate better with the public, the Fed almost overshares its intentions. That made its recent policy pivot remarkable. After spending months preparing the markets for the onset of reducing its monthly asset purchases in November, officials gave short notice they likely would double that pace. That increase was announced in mid-December, along with accelerated projections for the first hike of the fed funds target range. A quarter-point hike could arrive as early as March, with possibly two more this year. That's a considerable jump -- as much as 75 basis points higher than September's dot plot." Federated writes, "Even if economic growth is slowed by the omicron variant, the Fed's concerns about inflation should be enough to keep tightening on track. Government, prime and tax-free money market yield curves have already responded by steepening, and we expect that to continue. While the front end of the Treasury curve will stay anchored, the Fed's reverse repo rate should rise in lockstep with the hikes. That would be great news for cash managers and investors." Cunningham also says, "We anticipate a strong year for the industry. In a rapidly rising-rate environment, money market funds and similar vehicles can lose assets because individual securities respond faster to hikes. But if the tightening is measured, as we expect, the industry could see inflows as the lag in the yield differential should shorten. When returns are similar, the liquidity provided by actively managed products can be the deciding factor for investors, who also may see a delay in the rise of administered yields of deposit products." Finally, she adds, "At its most recent meeting, the SEC had a high-level discussion about new proposals for money market funds. We were pleased to see that the regulator is proposing the removal of mandatory consideration of gates and fees. Federated Hermes sees this as beneficial to fund shareholders because it eliminates a potential redemption trigger and allows the fund's board and advisor more flexibility. But we view the proposal of swing pricing as unworkable. It would require substantial reconfiguration of current distribution and order-processing practices, eliminate the existing ability of pricing shares on an intraday basis and eradicate same-day liquidity, one of the hallmark utilities of a money fund. While the commissioners discussed other potential changes, we look forward to examining the full proposal in greater detail as part of the regulatory rulemaking process."
