A year of intrigue

Caution, not capitulation The markets took the December FOMC dot plot as proof the Federal Reserve capitulated to their expectations for at least five rate cuts in 2024. In contrast, we take Chair Jerome Powell’s word “cautiously” at face value and anticipate only 75 basis points of easing in the back half of the year. We just don’t see inflation declining enough to satisfy policymakers, especially as energy prices have accounted for much of the decrease. Officials have not put the cautionary tale of the 1970s back on the shelf. If PCE/CPI are stubborn or surprise to the upside, the Fed likely will return to its “higher for longer” stance. This scenario would keep cash attractive, even as some investors extend duration to other asset classes. Most liquidity products should continue to mirror the target range. You might think clients will exit the broad sector as yields fall. But past instances of policy easing actually have led to asset inflows as yields declined slower than other cash options and direct securities. That’s not assured, of course, but we can guarantee 2024 will have an abundance of intrigue.

Global policymakers push back Many of the world’s central banks face similar market calls for easing, in part because they typically follow in the Fed’s footsteps. Most also are struggling to convince traders and investors they are in no hurry to cut rates. The banks of Europe, England, Australia and Canada, among others, are not ready to declare victory over inflation even in the face of potential recessions. Excepting the perma-doves in the Bank of Japan, the tension between expectations and projections likely will dominate the first half of the year.

Positive response to regulations The remainder of the SEC’s new money market fund rules kick in this year, and the industry has been hard at work creating solutions for clients. The requirement for money funds to hold 30% and 50% in daily and weekly liquidity, respectively, begins April 2; enhanced reporting and accounting start June 11; and the mandatory liquidity fee on institutional prime and institutional municipal funds if net redemptions exceed 5% of the fund’s total net assets (unless the liquidity cost is <0.01% of the value of the shares redeemed) begins Oct. 2. Expect the main players to alter some products and create new ones to continue to provide the benefits liquidity vehicles offer.