Pushback

Sporting suits instead of cowboy hats and rugged clothes, the world’s central bankers always look out of place at the Federal Reserve's annual symposium at Jackson Hole, Wyo. Not saying economists can’t ascend one of the Grand Tetons, but they do think of interest rates when they hear the word “hike” rather than glorious trails with stunning views. Maybe I’m jealous, but I have never understood why they couldn’t just meet in Washington, D.C.

In fact, the event is essentially an FOMC meeting minus an actual decision, with statements coming from interviews with many members and remarks by the chair. This one, which took place last week, was remarkably similar to last year’s, with tough talk about slaying inflation and projections of the next policy action. To that end, Chair Jerome Powell referenced his terse and hawkish 2022 speech in his keynote—no doubt to emphasize the Fed has lost none of its commitment. “The message is the same: It is the Fed's job to bring inflation down to our 2% goal, and we will do so.”

But unlike last year, when the rate path was extraordinarily steep, Powell seemed to equivocate by outlining the conditions that would prompt the Fed to consider further hikes without promising any. The conditions are, of course, economic data. But one got the feeling he was returning to the tactic of providing forward guidance. The markets once again are disregarding Fedspeak, pricing in no fewer than four quarter-point cuts in 2024. Powell’s real message was to disabuse investors of this view. In so many words, expect higher for longer.

We think this outlook could translate to another quarter-point hike rate, more likely at the November FOMC meeting than September's. It’s important to remember the Fed usually is biased to its current direction. It prefers long ramps to switchbacks. The last thing policymakers want is to reverse direction if they ease too soon and inflation rises again—losing credibility and effectiveness in the process. This is probably why Powell took the time to push back on the recent speculation the Fed might raise its inflation target higher than 2% because of various structural shifts in the global economy (actually the theme of the symposium). He wants the markets to stop looking for justification for fighting the Fed.

Good riddance, fees and gates

Oct. 2 will be a happy day for cash managers. That’s when the SEC officially removes the potential imposition for redemption gates and the link between weekly liquid assets and potential fees on prime and municipal money market funds. The damage has been done—nearly $1 trillion in assets exited these categories when the rules were adopted in 2014 and implemented in 2016. But we expect retail clients and sweep accounts to inch back into the prime space, potentially benefiting investors with attractive yields. Speaking of assets, the money fund industry continues to hit new records for assets under management due to the Fed tightening cycle and the potential that rates will hold steady for some time. Also, SIFMA has been extraordinarily volatile this year but at present sits at appealing levels that could lead to inflows into municipal money funds.  

Bank downgrades should have little impact

First the federal government, now several prominent banks. August saw the three major rating agencies downgrade several regional U.S. banks. The specific reasons vary, but the big picture is concern over the blows received by the aggressive tightening, exposure to risky CRE loans and reduced deposits. As is often the case, the punishment comes as most banks have addressed these problems. The collapse of Silicon Valley Bank and others in March seems more idiosyncratic every day. But it must be noted that regulations demand that money funds adhere by strict standards when purchasing commercial paper and other bank instruments, and most cash managers hold themselves to even higher standards. In other words, the downgrades should not materially affect the liquidity market.