Month in Cash: The waiting game
We closed out July with the release of the statement from the July 30-31 meeting of the Federal Reserve’s Federal Open Market Committee (FOMC). As expected, the FOMC indicated the Fed will continue to pursue quantitative easing measures, at least for the time being, at its current pace of $85 billion per month of Treasury and mortgage-backed securities.
It’s not surprising the Fed made a decision to continue to monitor rather than to enact any changes to QE at this meeting, which was held against a backdrop of mixed economic data. There has been some slowdown in areas of the housing market, with prices still rising, but at a reduced rate. New home sales seem to have staying power, but existing home sales have hit a speed bump and have been trailing off somewhat. While employment gains look steady, there are signs of caution, and while confidence readings out of the University of Michigan look better, future expectations are down.
In addition, this particular FOMC meeting was not scheduled to include a press conference by Fed Chairman Ben Bernanke to put any announcement in perspective. The bond markets had an allergic reaction in June to the news that an end-date for QE measures was approaching. The markets priced in the concept during July, so all players should have gotten the message by now. If economic data had been stronger, it might have given the Fed the go-ahead to make an announcement after this meeting, but the mixed data provides cover to hold back a little longer.
Depending on economic conditions, expectations are that the Fed will take its time in scaling back QE, at a possible draw-down rate of $20 billion each month, until it is no longer making purchases. The second half of this process—getting the $3.7 trillion (and growing) of existing purchases off the Fed’s balance sheet and back into markets—should last through 2014 and might likely be accomplished by holding some until maturity. Bernanke has been clear that this slow unwinding of QE measures should not be confused with adjustments to the federal funds rate, a step that is expected to take place after QE measures have been wrapped up.
While Bernanke is all but certain to be winding up his own Fed involvement by January 2014, there have not yet been any clear messages as to a successor. The two leading contenders seem to be vice chair of the Fed's Board of Governors Janet Yellen and former Treasury Secretary Lawrence Summers. The decision will have consequences for both the future direction of the Fed and for market reactions. Yellen is a known quantity, and has been a part of, and on board with, current policy. Summers has been a critic of QE, and brings a more direct communication style to which markets might have to adjust.
Repos scrape along
Repo rates remain in low, low territory, hovering in the one to four basis-point range. We do expect the Treasury to have some additional financing needs in August that should necessitate the need for some cash management bills in the two-week to one-month range, so there could be some (temporary) relief in the next few weeks with this additional supply in the marketplace. It’s also likely that the expected announcement from the Fed of the beginning of the end of QE measures, possibly as early as September, will give a boost to both agencies and Treasuries. Rates in the one-week to one-month range have been holding up relatively well, in the high teens, so in cases where we can go slightly further out on the yield curve and still maintain liquidity standards, there are some (slightly) better options.