Investors listen to comments by all Federal Reserve (Fed) policy leaders, but their ears prick up for only a few. Of course, the primary one is the chair. But the New York Fed president is not far down the list. While other regional bank presidents spend a limited number of years as voting members of the Federal Open Market Committee (FOMC), the New York Fed president is a permanent voter and traditionally an influential figure. So, when its current head, the veteran John Williams, said he essentially would be in favour of a rate cut at December’s policy-setting meeting, investors took notice.
Williams pointed to a softening job market as a greater risk to the US economy than inflation. He said this in a speech in Santiago, Chile, on 21 November but he might as well have shouted at the corner of Wall and Broad Street. Afterward, the fed funds futures market increased from only a 29% likelihood policymakers would lower rates in December to 70%, and the odds continue to grow. We had thought a cut probable, taking the target range to 3.50-3.75%, but feel more confident now. It is interesting that Williams took this position on the heels of the unexpectantly strong (119,000 jobs added) September nonfarm payroll report belatedly released on Nov. 20. However, the Bureau of Labor Statistics revised the prior two months down by a total of 33,000 jobs, September’s unemployment rate rose from 4.3% to 4.4% and other measures of the labour market have deteriorated.
Frozen assets
At the press conference following the October FOMC meeting, Chair Jerome Powell said the Fed would “freeze the size of the balance sheet.” He was referring to the end of quantitative tightening (QT), but it was intriguingly casual compared to the language of the statement: “The Committee decided to conclude the reduction of its aggregate securities holdings on 1 December.” Before you say what’s the big deal, remember that Fed officials carefully craft their words. For instance, Powell had been calling the amount of reserves “abundant,” but is now referring to them as “ample.”
Powell and company want to do whatever possible to avoid parallels to September 2019, the last time the Fed stopped shrinking its assets.
I mention this because I suspect Powell and company want to do whatever possible to avoid parallels to September 2019, the last time the Fed stopped shrinking its assets. Cash managers remember well that a mixture of factors combined with declining bank reserves unexpectedly coalesced, sending repo rates soaring. Fed officials intervened by adding assets, and a few weeks later created the Standing Repo Facility to serve as a backstop. Case closed?
Not exactly. Recently, the Secured Overnight Financing Rate used for repo transactions has again been trading higher. Not anywhere close to 2019, but more elevated than the Fed would like. My colleague Susan Hill wrote an excellent piece laying out the situation and explaining why we do not anticipate disruptions anywhere near that previous episode. Powell’s casual demeanour made it seem it was no big deal, but he perhaps should have just said outright that the Fed is well prepared to avoid a repeat, which we think is the case.
Higher and higher
Crane Data returns this month to Pittsburgh, where Federated Hermes is headquartered, to hold its Money Fund University educational series. Discussion will surely include forecasts of just how large the still-growing liquidity market will get. The Investment Company Institute reported that industry money market fund assets reached a record high of US$7.54tn in mid-November. As December traditionally sees the most inflows, that number certainly could increase. Total assets under management of US$8tn might not be in the cards. But the fact we are anywhere near that level shows the attractiveness of stable value products.
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