Chief Investment Officer,
Money Market Strategies and Distribution
Inflation data over the month has shown little in the way of relief. Price pressures remained high, with May core CPI up 0.6%. Core CPI is now running at an annualized rate of 6.2%. Underlying inflationary pressures are broad-based and don’t show any signs of quickly abating. This level of persistent inflation will be difficult for the Federal Reserve (Fed) to ignore.
May’s payroll report showed strong gains as US employers added 428k jobs versus expectations of 380k. The unemployment rate remained unchanged at 3.6%. Employment gains were led by hospitality, manufacturing and transportation, and warehousing. The strength of the labor market is supportive of the Fed’s aggressive approach to raising interest rates.
Minutes from the Federal Open Market Committee’s (FOMC) May 4 meeting clearly conveyed the Fed’s intention to raise interest rates as quickly as possible to reach neutral. Chairman Powell effectively committed to markets that the FOMC would deliver 50-basis-point rate hikes at both the June and July FOMC meetings.
This month the Fed begins Quantitative Tightening (QT), allowing securities to mature from their $8.9 trillion portfolio. The Fed will initially allow $30 billion in Treasuries and $17.5 billion in mortgagebacked securities to mature per month over the next 3 months to reduce the balance sheet. Beginning in September, those monthly caps will grow to $60 billion and $35 billion, respectively.
In May, markets witnessed a major setback to the world of cryptocurrencies. The collapse of stablecoin TerraUSD increased investor scrutiny of the crypto complex. Janet Yellen, who has been a strong advocate of increased regulatory oversight, again asked Congress to establish a regulatory framework for the stablecoin market. We believe the turmoil in the stablecoin market strengthens the case for money market funds.
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