Could Fed voters finally be on the same page?
“Some,” “a couple,” “a few,” “most.” If you are looking for precise numbers in the minutes of a Federal Open Market Committee (FOMC) meeting, you will be disappointed. They don’t mention names at all, and when they refer to how many officials agreed on a given point, they use vague quantifiers.
With the Federal Reserve shifting policy after a summer and fall of rate cuts, scouring the document is still worthwhile. In this case, the minutes from the October FOMC meeting simply confirmed what the statement and Chair Jerome Powell said. Policymakers feel it’s time to see what the effect of the rate cuts are on the economy. They are going to rely on the data—there’s the precision!—to give them direction. With the economy showing moderate growth, underpinned by that remarkable labor market and moderate inflation, they are on hold now unless something drastic alters the economic path. The Fed doesn’t generally act on a month’s worth of data.
Actually, the last policy-setting meeting of the year on Dec. 10-11 might result in an “all.” A flurry of speeches by Fed governors and regional presidents in the last few weeks suggest there won’t be any dissenters to the vote, which will almost certainly be to leave rates unchanged. If so, that would be the first unanimous vote since May.
How this all shakes out in 2020 depends on many factors, but fed funds futures aren’t predicting any move until the second half. One thing certain is the complexion of the FOMC will change. Every year, four of the regional presidents roll off from being voting members and four new ones take their place. The two who dissented the most this year—Esther George and Eric Rosengren—will not have a vote in 2020. However, as best we can tell, the new group will be a mix of hawks and doves, on net not changing the overall policy stance.
So where does this put liquidity products? In a good position again. The prevailing expectation this year that the Fed would not take rates to post-financial crisis lows has proven true. With cuts likely behind us for now, money market funds’ core attributes of relative safety, liquidity and diversity can play their traditional role for portfolios—especially as other asset classes have swayed with the state of the U.S.-China trade war and other uncertainties. With the Treasury yield curve no longer inverted and the London interbank offered rate (Libor) positively sloped, investors are getting some risk premium for going out the curve.
A few comments on the repo markets. The Fed continues to do everything it can to control the volatility in the overnight rate with temporary and permanent open market operations. It continues to consider creating a repo facility and also issuing a 1-year Treasury bill floater indexed to the Secured Overnight Finance Rate (SOFR). It seems this combination is working, as repo rates held pretty well in the 1.50-1.60% range in November. We were opportunistic with our purchases in November, open to just about any approved investment: asset-back securities, bank instruments, commercial paper, government securities, Treasuries, etc. The target weighted average maturity (WAM) of our funds remained in a range of 35-45 days for government and 40-50 days for prime and municipal.