Ahead of expectations Ahead of expectations http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\hot-air-balloons-hay-field-small.jpg May 9 2022 May 4 2022

Ahead of expectations

The Fed moves to curb inflation.

Published May 4 2022
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Podcast Transcript
Brian Ronayne: Good afternoon, everyone, my name is Brian Ronayne Executive Vice President of Federated Hermes and welcome to Federated Hermes' quarterly liquidity webcast. We, like you are still digesting the Federal Reserve's announcement of the 50-basis point rate hike in the Fed Funds target rate and plans for reducing its massive balance sheet. This is one of the most aggressive Fed stances in recent history - it's focus on curbing inflation is extraordinary. High inflation is harmful to producers and consumers alike, but the response by policymakers is critically important to the liquidity markets. After two years at the bottom of the ocean, money market funds and similar investment vehicles have surfaced once again to provide attractive returns. As was the case in the last cycle of rising interest rates, we are thrilled to see this important asset class once again reveal its relevance, particularly amidst this year's volatility within the equity and fixed income markets. In a moment Debbie Cunningham, just named one of the 100 Most Influential Women in US Finance by Barron's magazine, will outline how we anticipate the relevant yield curves will respond to the Fed's plans. She will be joined by Steve Chiavarone to discuss several other topics, including our house views of inflation amid supply-chain issues, the red-hot labor market, and other macroeconomic trends. We appreciate you tuning in and thank you for your continued confidence in our ability to provide clients with solutions along the liquidity continuum. What do you think? Reactions?
Debbie Cunningham: Thanks Brian and thanks to everyone for joining us here this afternoon. Well, first of all, what I think is that some of the quotes and some of the discussion topics that have been in the press, over the course of the last several weeks to a month, in consideration of whatever the Fed's interest rate path might be are not necessarily as valid as Fed speak itself.Fed speak continues to be the most important item that we can watch. And I might emphasize that it is really Chair Powell's speak that reigns supreme in this particular market from an expectation standpoint. So, the FOMC, as you mentioned did meet yesterday and today there regularly scheduled May meeting, and as we anticipated they delivered on the 50-basis point increase to the Fed funds target range, which brings us now to a range of 75-basis points to 1%. We see the reverse repo rate having gone up to 80 basis points. IOER increased by 50 basis points to 90 basis points, these are all as expected. And what we are looking at for a liquidity yield curve, right now in the live markets, is something that goes on a one month to 12-month basis from about 42 basis points out to right around 2% give or take a few basis points on any given movement from a tick standpoint. You also see what I think is maybe a little bit of an overreaction in the bond markets with improved positions across the board, and I think the reason that that has occurred is a couple fold. Number one Fed Chair Powell emphasized inflation. He mentioned that growth remains strong, there are real signs that despite the negative print in GDP in the first quarter, tight labor markets, unemployment rate of 3.6% strengthening conditions in other categories, will continue to provide momentum to keep growth on a positive projection for 2022. He also mentioned the labor supply being subdued which is really driven inflation in that particular category. He also mentioned, very specifically, that we should expect an additional 50 basis points per meeting in the next couple of meetings- couple to me means 2. So, we're talking about June and July, and he also very specifically mentioned no 75 basis point increase, I think that heaven and earth would have to change positions to get 75 basis points after that particular conversation or after that comment. In addition, with regard to positioning going forward and the path forward, he expected the FOMC to remain nimble. They will respond to incoming data looking at financial conditions and making judgments. To me, although he didn't say it, this just means that the old phrase data dependency is back in vogue. We've been saying that for the better part of the month of April and now into May, and I think we'll continue to say that and look at that going forward. He expects job creation to slow. He expects that to be because of less supportive monetary and fiscal stimulus, but not to drive the US into a recession, at this point. It is a plausible path, from his current thinking, and for various reasons, surplus of demand, great employment conditions that threading the needle, or walking the tightrope and engineering a softish landing, is quite achievable. Chevy, what were your thoughts along the press conference lines and his responses to the questions from the market.
Steve Chiavarone: I thought it was an interesting read, in that it was I'd say more or less in line with our expectations. We had been thinking 50 basis points and then when we discussed this earlier in the week Debbie, we were both under the impression of three, 50 basis point hikes this year, being the most likely outcome, and this kind of belly of the year. Maybe a tad short of our expectations on the balance sheet run off, and I think we were thinking something closer to that 95 billion dollars per month kind of starting right away and kind of ramping up and there's a little bit more of a ramp period here and some question if they'll get to the max on that 95 billion per month, but more or less, kind of in line with what we were expecting. . I think my takeaways would be the following, there's some risk here that inflation indicators, because of what's going on with continued pressure in Russia, Ukraine, because of what's going on with continued COVID zero policies in China, and because of the lags in monetary policy may not show signs of material deceleration by the time we get through the June, July meetings and the Fed may be pulled by data into extending that window, and I think that's one of the challenges that they've had that no point in the cycle have they appeared to be out in front of inflation; that they've been appearing to always be getting pulled along and I wonder if the reaction to today puts them in a position to be there again. I think when you think about the market expectations coming into today, while the announcements were in line with our thinking, there were certainly whisper numbers of 75 basis points either this meeting or, more likely in June. I know you weren't surprised by this maybe I'm used to the Greenspan briefcase indicators. The idea that he more or less ruled out 75 and more or less said we're doing 50 the next couple of meetings is level of clarity that is typical of Powell frankly, but not necessarily typical of some of his predecessors. I think he was trying to thread the needle there, in terms of getting the market off of the 75 but reminding them that this is still quite a hawkish move - let's not forget this is the most significant, is the biggest rate hike in 22 years and we are embarking on the most significant monetary policy likely since 1994. But yet somehow it was delivered in a way that the market took that as a dovish surprise today because we ruled out the 75 and maybe that balance sheet, so, as I look at the markets initial response here, both on the fixed income and the equity side - the 3% move higher in the S&P, the leadership of the growth stocks on the equity side. On the fixed income side, not only a rally in bonds, but, in particular, some of the rally in the longer duration bonds. I'd be surprised that these moves are sustainable outside of a couple of days or a week and I think we will find ourselves with incoming data very likely, on the other side of this where this is going to be an opportunity to short in duration, reduce exposure longer duration assets. The one key question now, I think, coming out of this meeting is next week's CPI data which is expected to decelerate from the prior month, but I think will certainly be in focuses as the market tries to gain some traction here, so, in line with our thinking historically very hawkish somehow market guide itself with up enough hawkishness that 50 basis points and 95 billion, a month was somehow a dovish surprise.
Brian Ronayne: So four, 50's not in play most likely, but where are we expecting to end the year, then, are we, 2.5? 2.25? Maybe I'll start with you Debbie and then over Chevy, what's your thoughts there.
Debbie Cunningham: So, I think we've certainly seen fast paced changes to where we end the year from a market expectation standpoint, Brian if you just go back to the end of the third quarter of last year. We were expecting a terminal rate that was less than 50 basis points - less than 50 basis points! We're past that now and we're not even at mid-year. If you then looked at the end of the year, we were looking at a terminal rate that was less than 1%. Again, we're past that at this point. The end of the first quarter of 2022, the terminal rate was expected to be just over two and a half percent. And right now we're looking at something that's right around 3% maybe a little over maybe a little under depending upon the day, depending upon market reaction to what the newest data is that's out, but I think a couple things to remember. These are all based on Fed Funds futures and first of all, Fed Funds futures are not necessarily buyable. They're not always reflective of where offered rates are so you need to look at market expectations to some degree by where offerings are in the marketplace, or we're bids and asks are in the marketplace and Fed Funds futures has not been a great indicator of that. Over the course of the last nine months or so prime spreads have widened out. Only really because government spreads have tightened in, as flight to quality with Russia, Ukraine, conflict has caused that sort of a situation, so we've seen prime markets and prime offerings be a little bit more reflective of these changing expectations and something now that gets you to a terminal rate that's right around 3%. And during that time period it's been great to be short weighted average maturities, long weighted average lives using floating rate securities as much as possible and honestly, I don't think it's time to change that strategy, yet I don't think we've got to the point where we're 100% sure that. I'm going to call it is sort of a terminal plateau. In either case I don't think we reach a rate and then go back down the other side, I think we stay there for a while and I don't know, though, especially in the government sector we're reflecting that accurately even yet.
Steve Chiavarone: Yeah what I would add here is we generally coalesced around an idea of two, 50 basis points of overall hikes in 2022 give or take a bit. Interestingly enough today for all the things that have changed since the Fed meeting, the number of implied rate hikes for 2022 has not, the market or the Fed futures market did obviously aggressively priced out 75 basis points in the June meeting, but for the full 2022 it's still at about two and three quarters, which is about where it was yesterday, in terms of total number of hikes so that implies eleven, 25 basis points moves over the course of this year, and would imply four, 50 basis points hikes, not the three that Powell guided to today. I think that's still plausible. I'm still pretty comfortable with our idea of two, 50s but again, I think what we'll talk about a little later on in our discussion here is and Debbie alluded to this, it's about data dependency. Powell indicate that he thought okay, maybe core inflation is peaking. Well that's great, but the question is how quickly, does it come down because if it peaks and stays 8% or six and a half percent that's not going to be good enough, and so I think we have to see how some of these supply shocks play out over the course of the next several months, and whether or not, when we get to September we're seeing real signs of moderation in inflation and then we have to adjust accordingly, but I thought it was interesting that, despite the rally in bonds today the Fed futures didn't really price out any rate hikes over the course of 2022, so that'll be an interesting dynamic see who wins that tug of war.
Debbie Cunningham: My bets on the market at this point adjusting.
Steve Chiavarone: I would agree, I think it's more likely that the Fed futures comes down to our two and a half unless data pushes our two and half, up, which has been the general pattern over the course of the last six or nine months, so let's see what the data is.
Brian Ronayne: Right when he has a chance to take a breather too in summer, because he's got the June and July meetings, he's going to do two, 50s there, and then he's got August to take a break and then he can evaluate, right going into September meeting.
Steve Chiavarone: I thought he was very clear, one of the things that was missed, I thought in the discussion today because some people have started, even at the very beginnings of rate is cycle. He asked the question about when the Fed might pause, which is kind of laughable right now, but he was I thought he was also very clear and saying look, when we stopped doing 50s, I'm not pausing I'm just going back to 25, and he said that pretty explicitly at this point so, I don't think we're skipping any meetings here for a while.
Brian Ronayne: Yeah right in terms of the rate hike cycles, in general Chevy, I will come to you on this one, as it relates to the soft landing, there was a reference there to soft-ish landing, I noticed he commented about that - reactions to his soft-ish landing and then Deb, I will ask you to follow up on Chevy's thoughts.
Steve Chiavarone: I'm going to start to refer to myself as tall-ish maybe that will work, you know what's inside of that. For those of you that know me or can see me you will understand why that's a funny comment. So there have been 11 rate hike cycles since 1970 as defined, as you know, at least three hikes without any cuts in between, right. And you've had recession that have followed eight of those. So for roughly 70% of the time when you're engaging in monetary policy tightening, you've had recession, so the track record there is what it is, and there are there are elements this cycle that are unique that I think Debbie talked about in an important way. We have a tighter labor market, you have all of these kind of job openings that Powell referenced multiple times they're kind of two to one job openings to folks looking for work. Strong consumer balance sheets, a strong business balance sheet, but, the track record is that most of the time when the Fed engages in a hiking cycle you've got a heightened risk of recession; I think you have to start there. And I think that was his comment, he can see a path towards a soft landing, but he also recognizes that's a very difficult thing to do, it's going to be very difficult to engineer. And let's just say that the last 12 to 24 months, will probably not be looked back on in history as a perfect 24 months of monetary policy. So, again, I think there's a challenging path there. Now the good news, I think for risk assets are at least as you go well out into the equity space is it traditionally markets equity markets are higher 12 months after the first hike. Even on the bond side, again, I think we'll see what the terminal Federal funds rate is, and we'll see what the peak in the 10-year is and we'll see what the peak in the two year is but it's most likely we've seen a lot of that move. I don't think it's all of the move that we're going to see in the two year or the 10-year but it's probably some good chunk of it. And I think that's a little bit about what we saw today. It's hard to envision the 10-year yield moving between now and the end of the year to the same extent and magnitude that it's moved from the beginning of year, until now. I think you are probably looking at warm muted gains going forward so you know the good news is we still think recession risk, even if the Fed isn't able to engineer a soft-ish landing. As we look at the indicators that are predictive of recession, we still think that a recession is most likely, at earliest, early 23 more likely, a kind of 24 event when you look at the excess savings that consumers have amassed you're probably even at negative real incomes which we're facing right now, roughly three and a half percent negative real incomes. You probably not exhausting that savings until the back half for the end of next year. And so to Debbie's point we think recession risk is quite low for 22. We think you are likely to see economic growth, starting to slow in the back, half of 22 and through 23 if the Feds at all effective with its monetary tightening. The jury's really still out on whether or not they can do a soft landing or a hard landing and we're spending a lot of time thinking about this, and what we appear to be coalescing around is soft landing versus hard landing has a lot less to do with how you start the rate hike cycle. It has a lot more to do with when you stop it, and whether or not you immediately go into a kind of cutting cycle, or whether or not you pause. So, if you look 1984, 1987, 1994, which is a three kind of soft landing, you had a Fed that went right from rate hikes pretty quickly into rate cuts. In order to try to avoid that and so point being I think it's really early to tell hard landing, soft landing. Let's see how far they go, let's see how far the data pushes them and let's see how they respond over the course of the next 12 months. Debbie you want to add anything there?
Debbie Cunningham: Well, I was asked the question on the FHI earnings call with a street analyst this past Friday about the comparison of this rate cycle to other historic rate cycles. And so along those lines, and in particular the focus was with regard to the liquidity asset class, and asset gathering during that time period with increasing returns in that asset class. I think rate cycles prior to 1990 at this point to me, despite the fact that, there are 11 overall since 1970 that there's some that are ancient history. There was not a communicative Fed at that point in time and their moves in the marketplace were not directly spoken but rather done with actions, adding and subtracting reserves so much more luminescent as opposed to transparent. So I'm going to look at comparing more to the most recent rate cycles. 2004 - I think that was a very important rate cycle, because they were fighting inflation, similar to what this Fed is doing today, and then the 2015 - which I think is very important from comparison perspective, not because of the inflationary comparisons, but because they're starting at zero again so in a different type of a rate environment. And I think for both of these cycles there was excellent Fed communication and therefore I think market anticipation was very good and to a large degree yield curves were active. Trying to reflect, day-to-day, what those changes might be anticipating where the Feds moves during the cycle would be specifically from a liquidity asset class standpoint. That kind of good communication and good anticipation by the market generally reflects good asset growth, as returns start to increase, and in this particular case the returns on money market funds look comparatively great compared to the spot deposits, especially as we look at bank deposits beta is that generally lags the direct market something like a 40% lag. And in that particular environment you've got something that would be 100 basis points in market rates only being reflected 40 basis points in deposit products. Especially right now, when the banks are telling us, they don't even want deposits. I think you're going to see good asset gathering in the liquidity markets and to a large degree, because of the comparisons that we've seen and the anticipation that we've seen in the communication that's coming from this Fed.
Steve Chiavarone: Yeah and just to add one thing on that which is, in the March FOMC meeting the Fed all but acknowledged that deposit betas are likely to be quite low representing that kind of relative value opportunity for liquidity strategy, so I would echo that comment.
Brian Ronayne: So Chevy, sticking with you, real quick. So internally, we have an investment committee the Short Term Investment Committee that assesses where we think we're going to land in terms of rate projections. 22, 23, 24. Do you want to give our audience a sense of where we're landing, as a group, as a combined group within this committee?
Steve Chiavarone: yeah yeah. Sure, I think you know what you see is that the medium projection of the committee, our last meeting which was the second week of March and we are set to meet again next week. You know coalesced right around that 250, that 250 that we were talking about for 2022. With roughly another 50 basis points and hiking over the course of 23 and then very interestingly, a pause and when you look at the individual votes some folks that are calling for rate cuts in 2024 or at least rates that are staying flat. And, I think that's broadly consistent with our view. It suggests that you've got a Fed, that is, to borrow Fed Powell's term, trying to move expeditiously towards neutral. I believe he endorsed the range of neutral estimates as being somewhere between two and three percent today amongst the committee members. I want to say the official projection in March was 2.4 so we're basically saying that the Fed will use to expeditiously move to neutral, that in order to get inflation down you're going to have to move above neutral at some level and there'll be hiking further into 23 but that you will hit some point where either they will then pause and stop as they are gliding the economy into a soft landing, which I think is consistent with what we're showing here and kind of move into 23 and then some paus. Or they will hike too far and have to reduce rates in that kind of 24 period, as you know, 300 basis points of accumulated rate hikes push growth into negative territory, potentially. And I think you see really are our internal view of soft says hard landing is still very much in debate right now. There's roughly an equal number of votes in 24 that have rates moving slightly higher or staying flat versus those that may be see them coming down a little bit, and I think that that's all pretty consistent and frankly it's a view that I endorse. So we're a little bit more aggressive than the Fed for both 22, 23 and 24 in terms of the last set of dot plots. But I think it's an intellectually consistent path within what's frankly, not that wide of a range, everyone is between two and 2.75 or so for this year with a real kind of big group of folks right that 250 level. Debbie do you want to add anything or additional color.
Debbie Cunningham: Yeah, the only thing I'd add Chevy is that in this Short Term Investments Committee we don't operate in silos within FHI. We have folks from the liquidity section, the fixed income group. Chevy's the representative from the equity group and it's not in this committee only. We have macro committees, we have product communities, we have research committees, where again all three of the major asset classes come together to try to produce good results to reflect, the manager for all seasons logo or moniker that FHI has continued to put forth as the best type of manager in the marketplace. We emphasize the markets at any given point in time, that make them out the most amount of sense, and in this case from this committee's standpoint we're emphasizing liquidity markets with some spread that ultimately makes the most amount of sense in the current environment.
Brian Ronayne: Staying with you, if I could. Another aspect of today's conversation, but with Chair Powell was about quantitative tightening and the path that they're going to take. He talked about kind of gradual easing as compared to just starting immediately with the 95 billion. Do you want go through quickly what was discussed and your reaction to it.
Debbie Cunningham: Sure, and I will note that quantitative tightening is phase three in our original kind of three phase plan where QE is completed, that was Phase one. Lift off and interest rate changes was Phase two or beginning, we're continuing along that path. Phase three is simultaneous with Phase two just starting a little bit later we're learning all about that, in this particular meeting. They told us, a couple months ago that we would be doing 95 billion in securities reductions on a monthly basis for the initiation of Quantitative Tightening but that we would get more details at this meeting and that's exactly what he did what he gave us. The details are basically it will start with only half of that, and we'll start that in June, so, not the 60 billion in treasuries but only 30 billion. And not 35 billion for mortgages, but only half of that, 17.5 billion, and that, over the course of three months, we will ramp up to the 60 and 35 or the 95 billion per month, I think the bottom line from my standpoint is that's their current thinking with regard to QT plans, and that seems to be the market seems to take that as something that would be the equivalent of about a 25 basis point increase in rates, but I would also be cautionary in that when they announced the QE plans back in the second half of 2021, they announced them in September, began them in November, spread them up in December, and they were over in March. So they sped up that process quite quickly, I think if the bond market is willing and allows the Fed to adjust that QT process, upward, I don't think they would be low in considering that, because this ultimately, I think balance sheet reduction is a goal.
Steve Chiavarone: This was the point I was alluding to a little bit earlier in that I think this is a Fed, that is, in many ways, cautious that they wanted to do what they need to do to get inflation under control, but not get ahead of themselves. In many ways, I mean, I think that was what I was hearing from Powell where we're going to do QT and we're going to ramp it up. In each case I'm going to commit to two, 50 basis point, actually three but I'm expecting to go back to 25. I'm expecting that inflation will peak and come back down and he needs to do that right. He needs to provide the market with some comfort and expectations that inflation is going to come down otherwise if inflation expectations get, if he loses control over those in the market continues to expect inflation that accelerates, then he's lost the game, so I get that but one of the consequences of that is he can get pulled forward by the incoming data, just like Debbie was saying. You know QE was going to be one thing and then the data forced them to do something a little bit more accelerated and I do wonder if three, 50 basis point hikes eventually bleeding become, four. I do wonder if QT of a three month ramp up and 95 ends up becoming something more than that or faster than that as data dictates, and that risks, the Fed continuing to appear, to be pulled along by the data. As much uncertainty as we've had, I think we still have some but not quite as much as, because we know the plan, but I think there's still some they're written in dark pencil not black.
Brian Ronayne: Right, but so Chevy, let me stick with you over the theme here throughout has been inflation, inflation, inflation so do you want to give some of your perspectives on where we are with inflation - is it higher for longer are we picking your reactions to the Fed to Chair Powell's comments about we may maybe close to the peak curious your thoughts there.
Brian Ronayne: Say Deb - maybe you can bring it to you for a second if I could. As you digest all this there's also the impact on earnings, the impact on how banks are doing through this lending credit potential for a recession how consumers are going to respond how businesses are prepared. Can you take us through your assessment of the credit side of the equation, at least as it relates to the bank side and, frankly, if there's one ticket will be on banks feel free.
Debbie Cunningham: Sure Brian, I mean we continue from an analyst standpoint to opine on corporate health at this point in the cycle and how it will impact the Feds ability to sort of navigate that soft landing in this current cycle. We think that's pretty high at this point. Even in the current second quarter after seeing the negative GDP print in the first quarter of 2022, we're still seeing earnings increases overall and certainly more widespread than just in a few sectors, and there have been issues from a banking standpoint. Many banks over the course of being cash rich in the last two years have invested that cash in securities because the loan demand has not been as high and we saw the securities markets certainly, treasuries in particular ,declining in value over the quarter, so that caused a little bit of a hiccup in bank earnings, to some degree, in addition to especially some of the larger global banks getting out of Russia and Ukraine.
Brian Ronayne: I saw Deb that you were interviewed this morning on Bloomberg TV and there was a discussion not only around credit, but also around liquidity, liquidity in the system. Clearly through Fed stimulus, trillions without exaggeration, in the system, that kind of brings you back to the point that you and Chevy were talking about a moment ago is banks appetite for deposits and this whole deposit beta they're going to pay, they need to pay. I realize it is circuitous but it kind of brings us back of the point of the banks don't want/need deposits. You still feel that there's ample liquidity and enough liquidity out there that there's no concerns on credit, it's simply going to be a play on the revenue impact that's what deposit betas because basically means is the bank's going to make more money because they are not paying out the rate to the depositors.
Debbie Cunningham: And that's absolutely our expectations going forward, at least in the near-term Brian. We're not seeing banks paying up for even sort of the second-tier banks paying up for any type of liquidity; it's there, it's available. But they frankly don't really need it or wanted, having said that, because the rates in the Treasury market, sort of the risk-free market have been kept lower because of the demand for those treasuries in a changing and tumultuous market situation. Flight to quality types of declines in yields in those treasury markets, that spreads on some of the credit securities of the prime securities out there are wider than normal. But it's not because of credit concerns. It's because the other side of the equation. The comparatives that we use to determine that spread have actually declined, as opposed to the spreads going out so we think that's a gift right now and are loving the aspect of positive spreads with a huge amount of liquidity in the marketplace from, a large host of players.
Brian Ronayne: Yeah so Steve I throw it over you in terms of trying to tie all this up into a bow in terms of how to make the best of all this, having you invest in these markets. Do you want to take our audience through some of our best thinking in terms of how we would navigate these markets and kind of taking us along the liquidity continuum?
Steve Chiavarone: This is something we're increasingly committed to. We have long shared our views and our macro views through this setting and others. But in terms of what we're trying to do, going forward and my Multi Asset Solutions team and the role that we're playing here is to translate that into calls to actions views on asset classes and how we would position and share that to hopefully help our clients understand how to think about markets, and what some of the considerations that they may want to have as they allocate across the liquidity continuum by sharing our current thinking so, as we look out three kind of key themes, and again I think today's market action may represent an attractive entry point into getting more in tune with the themes that I'm talking about. One of those is you want shorter duration wherever you can find it because we still think path for rates is likely higher. There will come some rate hike that will either be the one that precedes the pause into a slow descent into a soft-ish landing or the one too many that gets us worried about recession and that will be the time for duration risk but that's not today, we think, right now, you still want to have less duration risk wherever available. Two - to Debbie's point we said we still think credit is strong, particularly on the short-end of the curve. And it will take some time for rate hikes to lead to a deterioration in credit quality and we're just not there yet. And three, floating rate securities, where you can find them at an attractive price are well position. So, when you think about the continuum of investment asset classes or sub-asset classes in the zero to three year part of the curve, we think liquidity, liquidity strategies, liquidity securities, in that very short-end part of the curve are our best position to Debbie's point. We think that the spread that you find in prime securities relative to their government counterparts really make them the best of the bunch. It's where you have the least possible duration risk, but are getting a spread because of the credit exposure there and we think that's quite attractive and position well against what's likely to be at least two more 50 basis point rate hikes. As you get out into that kind of managed reserve space thinking that kind of six to 12 months out on the curve we think that's certainly a much better place to be than something that's out six years on the curve or five or six years of the curve, given the shorter duration profile it's attractive maybe not quite as attractive as the liquidity strategies from a duration perspective but there's more yield pickup. And so, in that space we think again the shorter, you can be in that six-to-12-month part of the curve, the better. And we would not shy away from credit exposure there as well, we would, in fact, welcome it. We think that the government part of that curve is the least attractive, given that it's still has some duration risks and doesn't come with as much of a yield opportunity. And then going a little bit further out into the kind of short duration space, you know now I'm now in that two-to-three-year part of the curve. Adjustable-rate securities make a lot of sense, given the resets that are available there and given, there are leveraged higher rates in a positive way again as you think about more fixed rate parts. Of that curve, we prefer having the credit exposure as to not. Now, there may very well come a period over the next let's call it 12 months, where we want to lengthen duration and reduce credit exposure and prefer fixed rate securities, but we think at this point we're still quite a way from there.
Brian Ronayne: Very good, very well said, well, if nothing else, I think, in these markets, you know what resonates with me is active professional management, even in the very front end of the curve, is very important. And with your insights both Debbie and Chevy you give great guidance to our clients, we appreciate that very much. Thank you very much again for your time and we look forward to revisiting with you next quarter take care, all.
Disclosures: Views are as of 5/4/22 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. While bank deposits are FDIC insured, an investment in money market funds or other investments is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Variable and floating rate loans and securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much or as quickly as interest rates in general. Conversely, variable and floating rate loans and securities generally will not increase in value as much as fixed rate debt instruments if interest rates decline. The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index. The yield curve is a graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities. Deposit betas represent the percentage of changes in market rates that banks have to pass onto their customers. Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of short duration. The Consumer Price Index (CPI) is a measure of inflation at the retail level. Quantitative Tightening (QT) refers to policies that reduce the size of the Fed's balance sheet. Federated Investment Management Company.
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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

An investment in money market funds is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although some money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds.

Investing involves risks including possible loss of principal.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Variable and floating rate loans and securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much or as quickly as interest rates in general.  Conversely, variable and floating rate loans and securities generally will not increase in value as much as fixed rate debt instruments if interest rates decline.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

The cash-yield curve is a graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

Deposit beta is the change in funding costs divided by the change in interest rates.

Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Quantitative tightening (QT) refers to policies that reduce the size of the Fed’s balance sheet.


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