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September 20, 2022

No Pivot at Jackson Hole

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September 20, 2022

No Pivot at Jackson Hole

Market Insights

No Pivot at Jackson Hole

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September 20, 2022


Federal Reserve Board1

While the Federal Open Market Committee (FOMC) did not formally meet in August, markets closely followed Chairman Powell’s speech at the annual Jackson Hole Economic Symposium. He reiterated that policy rates need to keep rising well above the long-term neutral rate and stay there for some time. He acknowledged that to bring down inflation households and business are likely to experience “some pain.” Chairman Powell and the committee are willing to tolerate a softer labor market and a “sustained period of below-trend growth” to lower inflation. The FOMC will remain data dependent for its September meeting and sees policy moving to “sufficiently restrictive.”

European Central Bank1

At the European Central Bank’s (ECB) policy meeting on September 8, 2022, President Lagarde and the policy committee increased the ECB deposit rate by 0.75% to 0.75%. The Governing Council was clear in its forward guidance stating it “expects to raise interest rates further” due to inflation remaining exceedingly high. The ECB increased its inflation expectations now to 8.1% for 2022 while also lowering economic growth projections. While the committee remains data dependent and steadfast in its pursuit to curb inflation it suggests that inflation has yet to peak.

Bank of England1

At its August meeting, the Bank of England (BoE) Monetary Policy Committee (MPC) voted 8-1 to increase the Bank Rate by 0.50% to 1.75% as inflation “intensified.” The one dissenting vote preferred a 0.25% increase. Surging inflation in the U.K. can be attributed to wholesale gas prices, which have nearly doubled since May. The BoE is now expecting inflation to peak around 13% in the fourth quarter. Simultaneously, U.K. gross domestic product growth has started to decline, and the MPC now expects a recession beginning in the fourth quarter of 2022.

Display 1: Monthly Interest Rate Summary as of 8/31/22.

Source: Bloomberg

Display 2: MSILF Weighted Average Maturities (WAM) Summary as of 8/31/22.2

Source: iMoneyNet 



Prime Strategy3

The July consumer price index (CPI) decelerated by more than anticipated, to 8.5% from a year earlier, with core CPI below consensus at 5.9%, while non-farm payroll reports far exceeded expectations with 528,000 jobs created and an unemployment rate of 3.5% at a half-century low. In the minutes released from the July FOMC, officials reinforced hawkish messaging, citing a desire to avoid having elevated inflation become entrenched. As of August month-end, the market is pricing in more than 1% of additional tightening throughout the remainder of the year, with over 50 basis points (bps) anticipated at the September FOMC meeting. With expectations that the Fed will continue to tighten monetary policy in the near term, we remain comfortable managing the portfolios with elevated levels of liquidity and a short duration profile. Allocations to daily resetting SOFR and OBFR floating-rate notes continue to benefit the portfolios as their coupons reprice immediately following each rate hike.

Government/Treasury Strategy

In portfolios that can do repurchase agreements, we have kept the durations on the shorter weighted average maturity (WAM) side due to the nearly immediate yield benefit of higher repo rates following a rate hike by the FOMC. The Fed’s reverse repo facility continues to take in excess of $2 trillion daily, and we believe will likely continue to climb as rates rise. We feel our portfolio construction allows us to be proactive and responsive to changes in market conditions and interest rate levels.

Tax-Exempt Strategy3

The front end of the AAA tax-exempt municipal yield curve saw significant upward yield pressure in August, correcting months of distorted pricing and leading to a broad “bear flattening” of the curve. At the short end of the municipal curve, yields for variable rate demand obligations (VRDOs) rose during the month of August, driven higher by Fed rate expectations. The SIFMA Index,4 which measures yields for weekly VRDOs, finished the month at 1.50%. Our portfolio is well positioned for a rising rate environment, in our view, with a short duration and high concentrations in VRDOs.


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 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.

The views and opinions expressed are those of the Portfolio Management team as of August 31, 2022 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.

One basis point = 0.01%

The Bloomberg U.S. Municipal Bond Index is an index that covers the USD-denominated long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. It is composed of approximately 1,100 bonds.

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

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass.  Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

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.

Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation. 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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There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events.


You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. 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.


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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