Month in Cash: White noise

11-01-2017

Last month, I wrote that there would be “some noise” as the Federal Reserve creeps closer to likely hiking the federal funds target rate in December. Chief among them: the distortion of data because of hurricanes Harvey and Irma, the postponed debate over the federal budget and debt ceiling, the tapering of the Fed’s balance sheet and the announcement of President Trump’s nominee to lead the Fed in 2018.

Of course, Washington outdid itself, adding more political drama this week with renewed speculation of the role Russia may have had in the presidential election due to indictments levied by special counsel Robert Mueller's investigation.

Yet in the money market sphere, this uproar is just more white noise; maybe the volume is turned up, but it’s still in the background. After all, the strong third-quarter GDP flash of 3% indicates that not only were the effects of the hurricanes muted, but that the rebuilding efforts could even help to boost the economy in the fourth quarter. Also, if trouble arises over raising the debt ceiling, the Treasury’s extraordinary measures could push the issue off until March. Lastly, at $10 billion, the balance-sheet roll-off is modest at this time.

So expectations remain around 90% that the Fed—still led by Janet Yellen, let’s not forget—will raise rates 25 basis points to 1.25-1.50% in December (not at this week’s meeting). The London interbank offered rate (Libor) was essentially static in the short end in October, with 3-month and 6-month Libor barely edging up, from 1.34% to 1.38% and 1.51% to 1.57%, respectively.

The biggest risk comes with President Trump’s nomination of the next Fed chair. His administration indicated he would make the decision before he leaves for Asia, which would mean this week. The Wall Street Journal reported late Wednesday afternoon that Trump had settled on the leading candidate and current Fed board member Jerome Powell, who most think would continue the current accommodative policies. An official announcement was expected Thursday morning.

The slight steepening in the short end of the Libor curve made floaters and fixed-rate paper attractive in October. We therefore maintained a weighted average maturity (WAM) of our products in October’s ranges: 40-50 days for prime and 30-40 days for government and municipal funds, with most lying in the far end of these target ranges. It’s important to remember that, industry-wide, prime products tend to be more responsive than bank deposits to rising rates because they trade Libor, which traditionally traces Fed hikes faster and that money funds provide a market rate, not an administrative one chosen by a bank or similar institution.