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September 21, 2021

Central Banks Tighten Their Messaging

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September 21, 2021

Central Banks Tighten Their Messaging

Market Insights

Central Banks Tighten Their Messaging

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September 21, 2021


Federal Reserve Board1
While the Federal Open Market Committee (FOMC) did not formally meet in August, Chairman Powell spoke at the annual Jackson Hole Economic Symposium. At last year’s conference, Chairman Powell outlined changes to policy including average inflation targeting, which in effect lets inflation run temporarily hotter. This year he hinted at the timing for a policy action. The Federal Reserve (Fed) chairman hinted that the Fed is likely to start reducing its monthly bond purchases before the end of 2021 as the economy and inflation have exceeded expectations. In addition, he stated that future rate hikes are neither tied to the pace nor the timing of the bond buying reduction. While inflation is a significant piece of the Fed’s dual mandate, Chairman Powell added, “we have much ground to cover to reach maximum employment.” For the Fed to raise rates, inflation will need to be solidly above 2% and maximum employment must be reached. However, the chairman also cautioned that COVID-19 continues to pose risks to the economy as the Fed monitors the impact of the delta variant.

European Central Bank1

The European Central Bank (ECB) did not hold a formal policy meeting in August. However, investors will want to pay close attention to the ECB’s September meeting as economic indicators and inflation gauges have moved upward recently.

Bank of England1

The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% and voted 7-1 to leave the size of its U.K. government bond purchase program unchanged at the conclusion of its August 5 meeting. The MPC noted that inflation was likely to temporarily increase toward 4% in the fourth quarter of 2021 before settling back down to closer to 2%. The policy committee shares similar sentiment with the Fed, as both suggested hotter inflation data to be “transitory.” While COVID-19 restrictions are likely to impact third quarter gross domestic product (GDP), the BOE projects fourth quarter GDP to be at or around pre-pandemic levels. Moving forward, the MPC will monitor economic activity to ensure proper policy measures are taken and suggested that “modest” tightening may be necessary in the next two years.

Display 1: Monthly Interest Rate Summary as of 8/31/21.

Source: Bloomberg.

MSILF Weighted Average Maturities (WAM)2 Summary as of 8/31/21.

Source: iMoneyNet 




Minutes from the July FOMC meeting released in August indicated that participants concluded their inflation goal had been attained while still needing to make progress on their employment mandate, stating that “Most participants judged that the Committee’s standard of ‘substantial further progress’ toward the maximum-employment goal had not yet been met.” Throughout the month, broader market volatility caused by concerns over the spreading delta variant did not flow through to the money market space, with 3-month LIBOR4 remaining range-bound near all-time lows. With a flat curve not compensating to extend maturities and take on additional credit and interest rate risk, we remain patient in our investment approach, waiting for dislocations in pricing before putting capital to work. Portfolio WAM (weighted average maturity) and WAL (weighted average life) organically rolled down throughout the month, with weekly liquidity remaining elevated in excess of 50%.


Overall Treasury yields remained similar to the prior month with most yields between 0.04% and 0.06% throughout the front-end curve. Bill auctions for late October through early November maturities stopped out 1-2 basis points higher due to some investor sensitivity near a potential debt ceiling limit date. There has been no legislation to address the debt limit yet as Congress continues to delay any resolution. We proactively sold Treasury positions we felt could be most at risk of a technical debt default. Given the lack of the market pricing in such risk, bids were competitive, and our portfolios had minimal yield impact to reinvest sale proceeds. Additionally, in our view, the risk of a potential deterioration of Treasury bids for those positions if market dynamics changed outweighed a “wait and see” approach. At month-end, the volume in the reverse repurchase agreement (RRP) facility hit a new high at $1.189 trillion on month-end, reflecting markets that are flush in liquidity. We continued to invest a significant amount of cash in overnight repurchase agreements and to manage the portfolios to be responsive to changes in market conditions and interest rate levels.


Municipal money market rates were virtually unchanged throughout August. At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) were little changed during the month of August. The SIFMA Index,6 which measures yields for weekly VRDOs, was unchanged at 0.02%. Yields at the longer end of the municipal money market maturity range were range-bound as well. The Bloomberg BVAL One-Year Note Index7 finished the month at 0.09%, up 0.03% from the prior month-end. It is possible ratios and credit spreads move lower in the coming weeks if volatility declines and a risk-on atmosphere returns to the macro landscape.


1 Source: Bloomberg.

2 Weighted Average Maturity (WAM): Measures the weighted average of the maturities of the portfolio’s individual holdings, taking into account reset dates for floating rate securities.

3 The Portfolio will be required to price and transact in their shares at a floating net asset value (“NAV”) and will be permitted to impose a liquidity fee on redemptions or temporarily restrict redemptions in the event that the Portfolio’s weekly liquid assets fall below certain thresholds.

4 The London Interbank Offered Rate (LIBOR) is the short-term interest rate that banks charge one another and that is generally representative of the most competitive and current cash rates available.

5 Government and Treasury Funds are Stable NAV funds.

6 The SIFMA Municipal Swap index is a 7-day high-grade market index comprised of tax-exempt VRDOs reset rates that are reported to the Municipal Securities Rule Making Board’s (MSRB’s) SHORT reporting system.

7 The Bloomberg BVAL One-Year Note Index represents tax-exempt municipal bonds that have an average rating of AAA by Moody’s and S&P.

The views and opinions expressed are those of the Portfolio Management team as of August 31, 2021 and are subject to change based on market, economic and other conditions. Past performance is not indicative of future results.

The Global Liquidity team aims to effectively meet clients’ unique cash and working capital needs, offering a broad range of money market funds, ultra short bond funds and customized separate account solutions.

The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment.

Past performance is no guarantee of future results. This document represents the views of the portfolio management team. The authors’ views are subject to change without notice to the recipients of this document. It does not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management and may not be reflected in other strategies and products that the Firm offers.

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