The table is set

For the second time in a row, Federal Reserve Chair Jerome Powell has telegraphed rate action in the run-up to a Federal Open Market Committee meeting. While his declaration that 50 basis points was “on the table for the May meeting” certainly was quieter than St. Louis Fed President James Bullard’s clamoring for aggressive moves, it removes one variable. That allows the markets to concentrate on the path of hikes and details of balance-sheet reduction. Once again, Powell’s press conference holds more intrigue than the shift in interest rates.

The potential terminal rate will be crucial to deciphering how worried the Fed is about its ability to subdue inflation. But don’t get caught up in the exact number. It’s not just that it’s probabilistic and fluctuates, but that policymakers think in terms of ranges, not points. It’s been some time since they targeted a specific figure for the fed funds rate. We anticipate a terminal plateau, not a peak. In order to make the hoped-for soft landing, the Fed needs a longer airstrip.

We fully expect overnight rates to move in lockstep with the jump of the fed funds target range, placing the Reverse Repo Facility and Interest on Excess Reserves at 80 and 90 basis points, respectively.

Unfortunately, the magnitude of the expected increase negatively impacted the responsiveness of money market products in April, a trend that might continue as they are slower to match the rising yields of Treasury and agency securities in the direct market. However, yields on institutional government and prime money market funds probably will follow historical trends and rise faster than deposit products (which individual banks set). Another bright spot is that most tax-free money funds had an outstanding April. That was driven in part by an attractive SIFMA Municipal Swap Index yield and validated by an influx of assets in the tax season, which usually sees the opposite. The big picture is that we are thrilled cash alternatives are offering the value they have for decades and expect inflows as the normalization process becomes more steady.

The deadline passed for public comments on the SEC’s proposal for new money market regulation (let’s be honest, “reform” is a misnomer). They show a landslide of opinion that swing pricing is not workable and that government and retail products should not be required to float NAVs in a negative-rate environment. There are a few discrepancies in the letters, such as suggestions for a response to a period of excess redemptions. We advocate that any imposition of fees should be discretionary while some suggest they be mandatory. We’d like to see the SEC drop this particular proposal entirely, of course.

Neither industry leaders nor the Investment Company Institute should sit idle as the SEC debates the potential changes. We have the obligation to persuade the staff and commissioners of the validity of the rebuttals and alternatives. A wild card could come if the Senate fills the open commissioner seat, though it is not on the agenda of the Finance Committee at the moment.

Anticipating continued dislocation in the short-end of appropriate yield curves—in part related to the flight-to-quality in the Treasury market due to Russia's invasion of Ukraine—we kept the weighted average maturities (WAMs) of our money funds in a target range of 25-35 days in April.