Month in Cash: Inch by inch, point by point


When the pace of change is glacial, every inch counts. You could apply that to a pair of aspects of the Federal Reserve this past month: its filling of governor posts and its overnight trading.

After months of waiting, the Senate finally confirmed Lael Brainard and Jerome Powell to the Fed's board of governors, and also approved Stanley Fischer as vice chair. But two open seats remain, leaving only five active governors. Considering how long it has taken to add Fischer, Brainard and Powell to the table, we’ll take it. While we would rather see seven, it would have been hard to imagine a Fed with only three governors (even though all the regional Fed president posts are filled) working in such a crucial time for the economy.

The three additions may not seem to have altered the central bank’s policy decisions following the Federal Open Market Committee (FOMC) meeting mid-month—it continued to taper its Treasury and asset-backed purchases by another $10 billion to $35 billion—but they will play a major role after this latest round of quantitative easing (QE) ends. That’s because the bigger issue is when the Fed decides to raise its benchmark federal funds rate and by how much. The consensus ballpark for this is for it to slowly rise starting in spring of 2015, but Chair Janet Yellen reiterated that any move will be data dependent on the economy’s health, and she thinks that is still under the weather.

Well, that means continued paltry interest rates for some time. But even from this perspective, a tiny bump up is at least something positive, and we have been getting that through the New York Fed’s Overnight Fixed-Rate Reverse Repo facility, which uses Treasuries as collateral. It is extremely risk-free, but offers only five basis points. So it was heartening to start to see counterparties offering a few basis points higher to take some of that business. Tiny as the difference was, we are happy to have it.

Dot matrix


Speaking of the big effect of tiny things, the “dots” returned. The FOMC has recently been asking its members to anonymously predict when they think the fed funds rate will rise and to what percent. These projections are indicated by points on a timeline/rate grid—the dot chart, as it is affectionately known. The placement of the points was ever so slightly hawkish than the last chart, especially in the short term. It was not that the members altered the time frame when they think rates will rise, but rather that several indicated they expected more of a rise in those times.

The nearer term is most impactful to cash management, of course; obviously it helps us the earlier we get an uptick. The dot projections essentially reflect each member’s assessment of the economy, which continued to strengthen this past month, especially in jobs, manufacturing and consumer sentiment, with a healthy increase in inflation coming at the end.

We did not change our Weighted Average Maturity (WAM) this past month. And there was—surely you can guess—little rate change in the marketplace. The London interbank offered rate (Libor) did not budge from 0.15% and Treasury bills shrunk from small to even smaller, all under five basis points. We continue to look at and utilize some floating-rate securities in anticipation of the yield curve actually steepening out a little bit and becoming slightly more attractive.

Small steps in the right direction are better than none.