MONEY MARKET | November 2022

Taxable Money Market
Commentary

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John Tobin

John Tobin

Chief Investment Officer,
Money Market Strategies and Distribution

At the November 2 Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) delivered a fourth consecutive interest rate increase of 75 basis points (bps). This increase now brings the federal funds target range to 3.75% to 4.00%. Markets now expect the Fed to increase rates by 50 bps at the December FOMC meeting, an additional 50 bps hike in February 2023, and a final 25 bps in March 2023, bringing the fed funds rate to a range of 5.00% to 5.25%. During the FOMC post-meeting statement, the committee members pointed to three factors they are now considering when determining the pace of the further rate increases: cumulative tightening of monetary supply, the lags that monetary policy effects activity and inflation, and economic and financial developments. The inclusion of financial developments suggests that, all else equal, there is now more sensitivity to potential financial market spillovers. The Fed’s goal of returning inflation to 2% now risks the potential of higher-for-longer interest rates. Committee members suggested there may be shorter lags in economic data than what traditional estimates have shown historically. The terminal rate is now viewed as more dependent on future economic and inflation data. Following the FOMC’s statement, markets rallied as participants interpreted the Fed statement as dovish, believing the Fed was closer to a pause than had been precited. However, at the press conference, Chair Powell outlined that inflation was not remotely close enough to where the Fed would consider a change in policy and markets quickly reversed.

October’s consumer-price index (CPI) rate of 8.2% was down 0.1% from the prior month and down from 8.5% last quarter. While energy and vehicle prices continued to decline, stickier inflation sectors have continued to remain strong such as rent inflation and service sector wages. Core CPI, which excludes the more volatile components such as food and energy, increased to 6.7%, up from 6.2%. The economy has not experienced this level of inflation since the late 1980s. Rent inflation is likely to remain strong as cooling home prices will take time to pass through to the rent component of this inflation calculation. Service sector wages, impacted by supply chain shortages and rising costs to businesses, have resulted in wage increases now being passed to consumers. Consumer spending, the engine of the economy, rose 1.4% from the previous three months, the weakest consumer spending number since the COVID pandemic began in early 2020. The personal consumption expenditures (PCE) price index, an inflation metric followed closely by the Fed, grew at an annualized rate of 4.2% in the third quarter, its slowest pace since end of 2020.

October’s employment report showed continued strength with nonfarm payrolls increasing by 261,000, above consensus by 66,000. Despite the slight 0.2% uptick in the unemployment rate to 3.7%, the labor market remains tight. According to the latest data of the Job Openings and Labor Turnover (JOLT) survey, job openings and quit levels remain at record highs with layoffs at record lows.

Third quarter real GDP rose 2.6%, down 0.6% from the prior quarter. Consumer spending, the largest component of GDP, decelerated to a 1.4% annualized pace this quarter from 2.0% the prior quarter. A decline in goods spending, food and energy was the main driver. Government spending rose 2.4% annualized, its first increase after six straight quarters of decline. Investment ex-housing rose 3.7%, with equipment spending up 10.8% and intellectual property products up 6.9%. However, residential investments declined 26.4% due to interest rates on 30-year fixed mortgages rising to over 7%, with expectations it will move higher. Increasing interest rates have decreased house affordability, dramatically decreasing housing sector demand. Net exports increased by 2.8% as imports dropped and exports rose. As the US economy continues to improve and demand for imports increases, we could see exports suffer as the rest of the world tries to economically catch up.

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MIC-319322-2022-11-09