The Federal Reserve met expectations—essentially 100% of them—by hiking its target rate in mid-December. That’s good news, of course, but don’t get used to expectations being met in 2017. It is setting up to be volatile, with expectations a little too positive amid many unknowns. One uncertainty is the tease the Federal Open Market Committee gave with new “dot plot” projections indicating the potential for three hikes in 2017. The market seems to have bought it. We still think two are more likely, although coming in March and September rather than June and December. That shift would leave open the possibility for a third move in December.
The largest variable is the fiscal policy the Trump administration will officially propose. We know less about his plans than those of any incoming administration in recent times. That spells volatility, even though its impact won’t be felt immediately. We have been conditioned in recent years to look to monetary policy alone for action on the economy. Now we should finally have real fiscal changes to consider. Expectations again play a role as people have high hopes for the positives Trump could serve up. We hope those will be met and that the Fed will keep its upward momentum, but there is plenty of room for disappointment. Remember, this is a Fed that has been reactive to conditions in the global markets, often allowing them to influence its decisions. In 2016 alone, it didn’t tighten due to the volatility associated with China or the surprise of Brexit. It might not take much to throw the Fed off course again.
But the most significant element in 2017 could relate to regulation—specifically the peeling back of some. This would be a boon to cash managers. While the recent money market fund reform is likely to remain, other regulations also have impacted us. Over the course of 2016, banking regulators influenced the patterns and predictability of issuers, leading many to cut back issuance lest they not have the required liquidity levels. This uncertainty was detrimental to the industry; money markets need short-term financing to work smoothly. It would help tremendously if banks were able to issue more 1-, 2- and 3-month commercial paper and CDs without worrying about being penalized. Thankfully, the U.S. Treasury stepped in and issued more bills and notes to bridge the gaps in 2016. But if banking regulations get rolled back to some degree, it should make for a more productive world for cash managers and their clients.
Don’t let the specifics I have mentioned above be the trees that cause you to lose sight of the forest. Overall, we are positive about 2017 and see upward steps for cash management. Yields most likely will increase as we get Fed moves, and there has been little movement in the net asset values (NAVs) of fluctuating NAV money funds in the industry as a whole. None of our floating-NAV funds deviated from the $1.0000 share valuation around the recent Fed move. We are still targeting our weighted average maturity to a range of 40-50 days for our prime and government money funds, and the London interbank offered rate (Libor) continues to be supportive. December ended the year on an upbeat note, and it may very well be a happy new one.