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July 20, 2021

Central Banks Upgrade Economic Projections and Remain Accommodative

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July 20, 2021

Central Banks Upgrade Economic Projections and Remain Accommodative

Market Insights

Central Banks Upgrade Economic Projections and Remain Accommodative

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July 20, 2021


Federal Reserve Board1

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 June meeting as expected. While the Federal Reserve (Fed) did not tweak its forward guidance or quantitative easing policies, it did make a technical adjustment to rates. The FOMC boosted the rate on its overnight reverse repurchase (RRP) agreement facility by 5 basis points to 0.05%, and increased the interest paid on excess reserves by 5 basis points to 0.15% to foster smoother funding in the money markets. The statement positively tweaked language regarding vaccinations and the economy, saying, “progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.”

In addition to the press release, the Fed updated its summary of economic projections. The main modification to the FOMC’s projections occurred in 2023 dot plot. Thirteen of the 18 voting members expect two rate hikes in 2023, as of June, compared to the March projections showing only 7 of 18 voting members expecting a rate liftoff. The six additional votes for a rate hike in 2023 was a surprise; market consensus anticipated only two additional rate hike voters in 2023. The FOMC upgraded its real gross domestic product (GDP) forecast to 7.0% in 2021 from 6.5% in March. Unemployment rate projections were roughly unchanged from March. The committee estimates core Personal Consumption Expenditures to rise to 3% in 2021, but ultimately level out around 2% over the course of 2022 and 2023.

Although the Fed upgraded its language and economic forecasts, it continues to stand by the economy in case expectations are mired by the ongoing COVID-19 pandemic or projections don’t materialize.

European Central Bank1

At the European Central Bank’s (ECB) policy meeting on June 10, 2021, President Lagarde and the policy committee left the ECB deposit rate unchanged at -0.50%, as expected. The committee kept the size of the pandemic emergency purchase program (PEPP) and asset purchase program unchanged in June. Although the ECB upgraded GDP and inflation projections for 2021 and 2022, the Governing Council noted it “stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.”

Bank of England1

The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 0.10% and the size of its U.K. government bond purchase program at the conclusion of its June 24, 2021 meeting. The MPC noted the higher-than-expected U.K. GDP in May has increased “expectations for the level of U.K. GDP in the second quarter of 2021 by around 1.5% since the May Report.” The committee also acknowledged higher-than-expected consumer price index inflation in May. Although expectations have been positively revised, the MPC views current policy as appropriate and will continue to “monitor the situation closely.”

Display 1: Monthly Interest Rate Summary as of 6/30/21.

Source: Bloomberg.

Display 2: MSILF Weighted Average Maturities (WAM)2 Summary as of 6/30/21.

Source: iMoneyNet 




After the Fed increased its administered rates at the June FOMC meeting, the money market curve adjusted 3 to 4 basis points higher in the following days. LIBOR4 also retreated from all-time lows on June 14 of 0.118% to close the quarter at 0.14575%. While our preference remains for fixed-rate securities due to their liquidity and roll-down benefits, recent increases in SOFR5 floating-rate note exposure have been beneficial to our portfolios as their coupons reset higher immediately after the technical adjustments announced at the June FOMC. Weekly liquidity in our portfolios remain elevated, in excess of 50% throughout the month.


After the June FOMC meeting, overnight repo rates largely moved higher to 5 basis points, in line with the Fed’s technical adjustment increase. The yield curve flattened as front-end Treasury yields increased and one-year yields held steady at around 0.07%. After the adjustment, the RRP volume increased dramatically as the new 0.05% rate was an immediate improvement over other investment options. At month-end, the RRP volume hit an all-time high of $991.9 billion, underscoring the excessive cash levels versus attractive investment options for short-end investors. In the portfolios, we extended durations after the FOMC meeting by purchasing Treasury bills, favoring 6-month tenors. 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.


At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) were unchanged throughout the month of June. The SIFMA Index,7 which measures yields for weekly VRDOs, held steady at 0.03%. Yields at the longer end of the municipal money market maturity range were little changed as well, as supply remained constrained. The Bloomberg BVAL One-Year Note Index8 finished the month at 0.14%, up 0.05% from the prior month-end. The short-term tax-exempt market is expecting to see good demand throughout the next month as the July coupon payment inflows peak and maturities outweigh new issue supply.


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 The Secured Overnight Financing Rate (SOFR) is a benchmark rate for US dollar-denominated loans and securities based on overnight transactions in the U.S. Treasury repurchase market.

6 Government and Treasury Funds are Stable NAV funds.

7 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.

8 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 June 30, 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.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Current and future portfolio holdings are subject to change. The forecasts in this piece are not necessarily those of Morgan Stanley, and may not actually come to pass.

Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

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You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds’ sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

The Tax-Exempt Portfolio may invest a portion of its total assets in bonds that may subject certain investors to the federal Alternative Minimum Tax (AMT). Investors should consult their tax adviser for further information on tax implications.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.



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Please be aware that liquidity instruments may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In the current rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest-rate environment, the portfolio may generate less income.

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