Month in Cash: Rates face pressure in the new year
As we head into a new year, the money market world faces interest rate pressure from a number of different directions. The Federal Reserve’s continued commitment to easing and its recent announcement that it would stick with the program as long as the U.S. unemployment rate remained above 6.5% doesn’t really come as a surprise. It was likely the Fed would set some sort of marker, but it is somewhat surprising they did so in December 2012, as many observers had thought this move might come sometime in 2013. It’s also interesting because the threshold level is closer than we thought it would be. (Of course, there’s always the option of changing that threshold level, as the Fed left plenty of wiggle room, if the goal ends up being too easy to achieve and we end up hitting the 6.5% target in mid-year 2013.)
And while the specific issues associated with the fiscal cliff seem to have been resolved in extra innings, there are other battles in Washington that could put some speed bumps in the way of the recovery, such as the expected showdown in February when Congress will need to raise the $16.4 trillion federal borrowing limit. As far as the money market world was concerned, the impact of a failure to solve the fiscal cliff by the Dec. 31 deadline was limited, as long as a deal came through before the associated tax increases, spending cuts and cutting of services kicked in. While the parties in Washington may have squeaked through this particular battle, the bigger fight continues.
Then there’s the death, as of Dec. 31, 2012, of the proposed Senate bill to extend the FDIC’s Transaction Account Guarantee (TAG) Program of unlimited insurance on non-interest bearing checking accounts. No extension was granted, and as a result we’re likely to see additional cash flow into money market funds. With supply steady and demand increasing, we expect lower rates in the first quarter. The Senate had proposed a two-year extension of the entire program, while an alternate bill proposed in the House was more limited, aimed at extending protection for only the smaller, more vulnerable banks. While some action may take place to revive the protections, if only for smaller banks, we’re still looking at lower rates in the first quarter.
Rates hold their own
Short-term rates last month provided a pleasant surprise in that they remained fairly firm. Overnight rates had been expected to drop down into the low teens or even single digits, simply because of all the additional purchases by the Fed, but in fact we haven’t seen that. At the beginning of December overnight rates were hovering at 20-22 basis points, and closed the month in the 18-20 basis point range, which is, all things considered, a very slight change. Treasuries have gotten more expensive, a function of younger people seeking out the safety of the government market, and not knowing what to expect over year end from a credit perspective, with the fiscal cliff continuing to hover over the economy.
