August 17, 2020
Central Banks Leave Rates and Stimulus Unchanged
August 17, 2020
Federal Reserve Board1
As expected, the Federal Open Market Committee (FOMC) kept the range for the federal funds rate unchanged at 0.00% to 0.25% at the conclusion of its July meeting. Although no structural policy changes were made in the month, the Federal Reserve (Fed) extended the duration of its pandemic lending facilities such as the Money Market Liquidity Facility (MMLF), Primary Dealer Credit Facility (PDCF) and others to December 31, 2020. Many of the pandemic lending facilities were set to expire at the end of September.
Economic activity and employment have “picked up somewhat,” the July release noted, but such data are “well below” pre-pandemic levels. While Chairman Powell and the committee acknowledged positive economic data, they believe the “path of the economy will depend significantly on the course of the virus.” Going forward, the FOMC continues to pledge that it “will use its tools and act as appropriate to support the economy.”
European Central Bank1
At the European Central Bank’s (ECB) policy meeting in July, President Lagarde and the policy committee kept the ECB deposit rate unchanged at -0.50%, as expected. The committee kept the total size of the Pandemic Emergency Purchase Programme (PEPP) at €1.35 trillion after having increased its size in the month prior. Similarly, the ECB’s Asset Purchase Programme (APP) was left unchanged. Moving forward, the committee forecasts rates to “remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2%.”
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 U.K. Gov’t bond purchase programmes. 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.”
Funding conditions continued to improve throughout the month, with 3-month LIBOR rallying from 0.30% on June 30 to 0.25% on July 31. With the Fed indicating that it is “committed to using its full range of tools to support the U.S. economy,” while also pledging to keep rates near zero in the near term, the market is pricing in no changes to the benchmark policy rate until 2022. As the yield curve continues to flatten on the short end, we maintained the duration of the portfolios by purchasing fixed-rate securities in the 5- and 6-month tenors, ending the month with the weighted average maturities of the funds at approximately 50 days. We remain comfortable managing the portfolio with elevated levels of liquid assets, ensuring that we uphold our mandates of capital preservation and liquidity.
The July FOMC meeting played out as expected, with Chairman Powell reiterating the Fed’s commitment to do whatever is necessary to support the economy and market functioning. Treasury yields fell during the month, especially at month-end, further flattening the curve as supply reductions continued. Washington did not come to an agreement on a new stimulus package during the month. Overnight repo rates were well contained in July, moving slightly higher near the federal tax date. We continued to buy fixed-rate Treasuries within 6-month maturities and agency floating-rate notes indexed off SOFR (secured overnight financing rate). We continue to ensure high levels of liquidity and manage the portfolios to be responsive to changes in market conditions and interest rate levels.
Yields for variable rate demand notes (VRDNs), which represent the majority of short-term tax-exempt instruments, increased in mid-July in conjunction with the extended federal tax filing deadline. The SIFMA Index, which measures yields for weekly VRDNs, rose to 0.21% on July 15 before dropping back down to 0.11% at month-end. At the long end of the money market range, new issuance continued to bounce back and the Municipal Market Data (MMD) One- Year Note Index dropped 0.11% over the month, finishing at 0.19%.
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.
The short-term tax-exempt market is expecting to see good demand throughout the next month as the August coupon payment inflows peak and maturities outweigh new issue supply.