MONEY MARKET | January 2022

Taxable Money Market

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John Tobin

John Tobin

Chief Investment Officer,
Money Market Strategies and Distribution

While the December employment report’s headline number of a gain of 199,000 jobs in nonfarm payrolls was much weaker than forecast, there were several other factors that showed significant underlying strength. The unemployment rate fell to 3.9% from 4.2% and average hourly earnings rose by 4.7% on a year over year basis. It is clear the pandemic continues to complicate the jobs market, but low initial jobless claims, rising wages and near universal “help wanted” signs are all indicators of strong underlying growth.

Most other economic indicators are also showing that, despite the very real challenges presented by the spread of the Omicron variant, demand from both consumers and businesses remains robust. Home and automobile sales and prices continue to gain despite supply chain related issues. Travel demand exploded over the holidays as people looked to escape almost two years of disruption. In addition, Omicron’s seemingly less serious symptoms and the wide distribution of vaccines has encouraged a return to a more normal pattern of life.

The minutes of the Federal Reserve’s December Open Market Committee meeting, released this week, showed increasing concern among policymakers as to the rate and duration of much higher inflation numbers. The drop in the unemployment rate to 3.9% adds to the indicators hawks on the committee can point to for an earlier move to raise interest rates.

The markets are pricing in a new, much more aggressive policy stance by the Federal Reserve (Fed). In addition to raising the overnight fed funds rate by 25 basis points as soon as March, the markets are also increasing the odds for an actual reduction in the Fed’s balance sheet in the second half of the year. The biggest challenge to that scenario remains an unwelcome twist in the course of the pandemic. Higher interest rates seem to be a small price that society will be willing to pay for that unwelcome twist not to occur.

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