No shortage of smart
The Federal Reserve continues to impress with how swiftly it addresses market needs in the coronavirus crisis. Emergency rate cut? Check. New facilities? Done. Quantitative easing? Of course. Shortage of coins in circulation? Somehow it got to that, too.
Last week, the Fed even beat itself to the punch when it extended many of the new special purpose vehicles the day before its Federal Open Market Committee meeting concluded. End dates are now Dec. 31 for the Primary Dealer Credit Facility and Money Market Mutual Fund Liquidity Facility, and March 17, 2021, for the Commercial Paper Funding Facility. None of these programs have seen much use recently, but they give confidence to the markets simply by being there. I think all should stay in place until the pandemic is over or at least until we get a vaccine. The Fed also extended its dollar liquidity swap lines and repo facility for international monetary authorities through March 31, 2021. This is another good move as these have added support for the front end.
One swiftly changing situation is out of policymakers’ control but certainly affects it. In mid-July, the Senate Banking Committee approved the nomination of Judy Shelton and Christopher Waller to the board of governors. If both are confirmed by Senate, the board would be full (seven governors) for the first time in several years. Waller, head of economic research at the St. Louis Fed, was always expected to make it through the committee, and is viewed as a dove. Shelton is another story. As a former advisor to President Trump, many are concerned she would ape his opinions, including supporting negative rates and limiting the central bank’s independence. Also, the preponderance of economists consider her call for a return to the gold standard—tying the worth of the dollar to the price of gold—untenable in today’s monetary and financial systems. A confirmation vote on the floor will have some drama as some Republican senators are coming out against her.
The short end of the Treasury yield curve edged lower in July in response to the reduced supply. Already at historic levels, The Treasury Department’s operating cash balance absorbed tax payments (both individual and corporate) on July 15, meaning it didn’t need to issue much debt. That will change when Congress passes the new stimulus bill, whenever that happens. Even in this case, the Fed has alleviated the situation. Its increase of overnight and term repo rates in June has provided a floor above zero, leading the effective fed funds rate hovering around 9 basis points in July.
Government fund asset levels were steady in July, while municipals experienced outflows typical around a tax day. Issuance of floaters and commercial paper went the opposite way as they continued their recovery from the barren days of March. Industry-wide, institutional prime fund assets essentially have returned to early January levels. For all of these reasons, we kept our weighted average maturity target ranges at 35-45 days for government and 40-50 days for prime and municipal.
The London interbank offered rate (Libor) was steady over July, short-term Treasury yields fell, and the Sifma Index spiked on tax day, but rose overall for the month.