See you in September
Next month will mark a half-year of hikes, time enough to evaluate their impact.
Nothing is so lonely as a recently concluded FOMC meeting.
In the days before Federal Reserve officials head to Washington, D.C., the Federal Open Market Committee meeting gets top billing in financial media outlets and many investor conversations. As soon as the statement comes out and the chair's press conference ends, the spotlight flies to the next one. This was especially the case with the meeting late last month. It’s not just that policymakers so telegraphed the 0.75% hike that the markets already had priced it in, but that the Sept. 21 meeting is more significant.
As is oft-repeated, monetary policy works with a lag. The trick is deciphering the length of that period. It’s dependent on many factors. But economists often point to the half-year mark for when the economy starts to show the impact of Fed moves. Turns out that the September meeting hits that timetable squarely, as it sits six months out from the initial hike of this cycle in March.
The September meeting has the added benefit of taking place after a down time for policymakers. We’ll get some speeches—we always get speeches. But other than the Fed’s symposium in Jackson Hole, Wyo., in late August, official communication drops in volume. What will come are reports, and lots of them. Chief among these will be two months-worth of inflation figures, labor data and sentiment surveys. The meeting also brings the release of new Fed projections, which are essentially an expression of the data policymakers tap for their decisions. Considering the Fed is going to give us less guidance in the future, the projections will take on greater importance.
By the way, it was interesting Chair Jerome Powell downplayed guidance so plainly in his press conference following the July meeting. He has prided himself in how effective that communication has been. To be sure, Fed decisions will lean more on the data than they did earlier in the year. But he seemed eager to protect the central bank’s credibility, which has been damaged by its missed call on inflation.
All in all, in September, markets and investors should have a better idea of how the hikes and balance-sheet reduction are affecting the economy—and the likelihood of a recession.
About that. Worry over recession has become an obsession lately. The potential for a slowdown is crucial for business plans and dominates how the Treasury yield curve and other rates move. Yet we shouldn’t spend too much energy trying to determine it. Yes, the economy shrank in the second quarter for a second consecutive quarter—many people’s definition of a recession. But it’s more complicated than that. What matters now is not what the National Bureau of Economic Research (NBER) eventually determines meets its definition of a recession, but what amount of tightening is needed to cool inflation. This is something Powell conveyed to the media even as he reiterated that the U.S. can avoid one.
We also think a soft landing—or soft enough—is possible. But the more important question facing the broad liquidity market is when the short end of the Treasury yield curve and commercial paper rates will peak as they anticipate when the Fed will pause and potentially ease. We have dabbled in longer-dated securities so as not to miss that, while keeping our portfolios short overall to capture the hikes. To that point, we have maintained the Weighted Average Maturities (WAMs) of our money market funds in a 25-35 day range. Like others in the industry, we have seen yields rise as other asset classes continue to struggle. Cash managers, at least, are looking forward to that September meeting.