September 17, 2020
Central Banks Continue to Hold, but Ready to Act
September 17, 2020
Federal Reserve Board1
The Federal Open Market Committee (FOMC) did not formally meet in August, but Chairman Powell did speak at the annual Jackson Hole symposium. As expected, he reaffirmed the belief that rates would be lower for longer and monetary policy would not stifle any potential recovery. Going forward, the Fed plans to let inflation run higher utilizing an “average inflation targeting” approach. This significant change in policy means inflation will be allowed to run “moderately” higher “for some time” before eliciting any potential rate hike. In addition to the aforementioned policy shift, Chairman Powell plans to modify the Federal Reserve’s employment mandate to become more “inclusive” which suggests a greater focus on targeting lower income earners. The FOMC meets on September 16, 2020, which many anticipate will clarify the policy changes referenced at Jackson Hole.
European Central Bank1
While no formal policy meeting was held in August, market participants and analysts expect the European Central Bank (ECB) to keep rates and stimulus unchanged. The ECB’s next meeting on September 10, 2020 is highly anticipated, considering the unprecedented policy actions taken by central banks around the world.
Bank of England1
The Bank of England (BoE) Monetary Policy Committee (MPC) met in August and voted unanimously to maintain the Bank Rate at 0.10%. In addition, the MPC voted unanimously to maintain its U.K. government bond purchase programs. The MPC illustrated a more optimistic view on the economy as its witnessed improvements in spending, household consumption and the housing market. It also noted global consumption had improved from the lows brought upon by COVID-19. While the BoE kept rates and stimulus unchanged, the Committee “will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit.”
Minutes from the July FOMC meeting and comments from Chairman Powell at the annual Jackson Hole symposium cemented the notion that rates will remain on hold for the next few years. With a flat yield curve and spreads remaining tight on the short end of the curve, we predominantly purchased securities that mature inside of year-end, allowing the weighted average life of our portfolios to gradually roll down to approximately 60 days as of the close of the month. Three-month LIBOR held relatively static month-over-month, but was still setting well above where most banks are transacting in the wholesale commercial paper/certificates of deposit market. We remain comfortable managing the portfolios with elevated levels of liquid assets, helping ensure that we uphold our mandates of capital preservation and liquidity.
The stalemate in Congress over the details of a new stimulus package continued throughout the month of August. As no agreement materialized, net Treasury bill pay-downs continued during the month, putting some downward pressure on short yields. Overall, the Treasury bill curve remained flat, with longer yields largely unchanged. We anticipate more Treasury bill supply, but the timing is dependent on the passage of another package. Overnight repurchase agreement rates softened somewhat during the month as we continued to invest in fixed-rate Treasuries largely up to six-month maturities. While fixed-rate agencies remain rich relative to Treasury bills, we bought shorter-dated agency floating-rate notes. We continue to seek to ensure high levels of liquidity and manage the portfolios to be responsive to changes in market conditions and interest rate levels.
At the short end of the curve, yields for variable rate demand obligations (VRDOs) dropped during the month of August. The SIFMA Index,5 which measures yields for weekly VRDOs, fell 0.07% over the course of the month to 0.09%. Yields at the longer end of the municipal money market maturity range were little changed during the month. The The Bond Buyer One-Year Note Index6 finished the month at 0.20%, up 0.01% from the prior month. Municipal issuers have been taking advantage of historically low long-term interest rates, choosing to finance more of their capital needs with longer fixed-rate structures rather than variable-rate paper.