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As anticipated, the Federal Reserve (the “Fed”) lowered the federal funds target rate by a quarter point at the September 18 Federal Open Market Committee (FOMC) meeting to 1.75%-2.00%. This was the second reduction of the target rate this year and the markets are anticipating further reductions in the federal funds rate in an effort to insulate the record-long U.S. economic expansion from slowing global growth. Many FOMC participants now see that the case for somewhat more accommodative policy has strengthened and the committee will continue to monitor economic data and will respond with policy changes when needed. The next FOMC meeting is scheduled for October 30.
Assets in tax-exempt money market funds have been steady during the past several months. The inverted yield curve has kept the rate on variable-rate demand notes attractive compared to fixed-rate notes and we see continued strong demand for these securities. The securities are highly liquid and are used to meet redemptions and adjust quickly to market changes. (The Securities Industry and Financial Markets Association (SIFMA) Index is a weekly high grade market index comprised of seven-day, tax-exempt, variable-rate demand notes produced by Bloomberg LP.)
Strong demand, plus limited supply, combined with the change in Fed policy resulted in a downward trend in fixed-income tax-exempt yields, moving the one-year index to a 1.20% reading. Demand continues to remain strong for shorter maturities due to the ongoing flattening of the yield curve and continued strong inflows into tax-exempt funds, particularly longerdated portfolios.
The majority of states began fiscal year 2020 on July 1, 2019 with an enacted budget (46 states begin the fiscal year on July 1 and only two had delayed budgets). Financial performance remains sound as revenue growth continued in fiscal year 2019 with economic indicators remaining positive. Personal income tax, corporate income tax and sales tax revenue all showed overall growth. However, uncertainty over the future direction of the economy and consumer spending prompted most states to prioritize bolstering reserve or “rainy day” funds to guard against a potential slowdown.
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