Just the facts
FOMC voters must stick to the data to make their next decision on rates.
For a word so central to many fields, it’s fascinating that we can’t decide if “data” should be a singular or plural noun. The vernacular has veered to the former, kicking “datum” to the curb. Many analysts, economists and scientists prefer using the grammatically correct latter configuration.
Of course, the Federal Reserve is always dependent on what the data show/shows. But gut feelings and abstract theories play a role. That shouldn’t be the case for the Federal Open Market Committee’s (FOMC) mid-December meeting. The markets are likely to interpret a downshift to a half-percentage-point hike as a change in monetary policy as investors are looking for any indication this tightening cycle will end. If the FOMC makes that move only to return to a three-quarter point hike in January, it risks losing credibility. That it cannot afford.
The economy is flashing many conflicting signals. Inflation is sky high, but October’s lower-than-expected CPI, PPI and PCE figures indicate it might be softening. While the housing market clearly has slowed, new home sales rose 7.5% in October compared to an expected month-over-month drop of 5.5%. The consumer remains strong, with likely record Black Friday retail sales and an increase in durable goods orders in October. Yet, several measures of the manufacturing sector continue to decline, including those calculated by ISM and S&P. Weekly jobless claims have been edging up, but the labor market remains robust.
The November nonfarm payrolls report, released tomorrow, and the November CPI report, released the morning of the FOMC rate decision, will be crucial. Will CPI sway any voters in real time? My guess is no, as the lion’s share of Fed officials, the minutes from the last FOMC meeting and Chair Jerome Powell’s speech at the Brookings Institution yesterday came across as partial to slowing the pace of hikes—meaning bumping the target range by 50 basis points on Dec. 14.
A brief word about the impact on the money markets from the downfall of the FTX crypto exchange: none. The short-term securities in which we invest traded steadily after the news broke, with no spread widening. Traditionally, an exchange is where the collateral resides that backs something. FTX’s collateral, whatever it was, has allegedly declined by many billions. But it doesn’t appear to have flowed into the secondary market in any material amount.
Across the money markets in November, prime funds ruled the roost again, led by a high influx of assets into retail prime products. Government fund flows were flat, and tax-free funds pulled back. The latter reflected the downward pressure on SIFMA caused by low issuance as municipalities still are flush with stimulus cash. We continued to position our portfolios short overall to capture rate hikes, maintaining Weighted Average Maturities (WAMs) in a 25-35 day range for our government money market funds and between 15-25 days for our prime and tax-free money funds.