Taxable Money Market

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John Tobin

John Tobin

Chief Investment Officer,
Money Market Strategies and Distribution

Responding to the troubling increase in inflation, the Federal Reserve (Fed), at its May 4 meeting, raised the overnight federal funds rate by 50 basis points. This was the largest rate increase in over 20 years and underscored the Fed’s dilemma as it seeks to engineer an economic “soft landing.”

The Fed also laid out a roadmap for future rate hikes as well as a plan to reduce its balance sheet, which ballooned in response to the worldwide pandemic. They made it clear that future rate hikes, at least for the next few meetings, would likely be 50 basis points as well. The Fed plans to initially decrease the balance sheet by $47.5 billion per month and progress to $95 billion per month in September.

In a somewhat surprising statement, Chair Powell quashed speculation of even steeper rate increases by saying it was “not something the committee is actively considering.” While equity markets initially rallied on these comments, the optimism was short-lived as sharp declines in the major stock averages and significant volatility were evident in the days following Powell’s comments.

The Fed is starting its tightening with the underlying economy continuing to show significant signs of strength. However, with a 3.6% unemployment rate and job openings plentiful, it is unclear how much the Fed will ultimately have to move to slow demand in a world still grappling with supply and logistic chain issues as well as oil and other natural raw material threats posed by the Russian invasion of Ukraine.

The Fed acknowledges that it cannot meaningfully impact the supply side issues facing the world. Their tools are designed to influence the demand side of domestic consumption and investment. How consumers and businesses respond as rates gradually increase will determine the Fed’s ultimate course of action.

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