Preparing for Action by the Federal Reserve
Monday, September 9, 2024
At its July 31 meeting, the Federal Reserve (Fed) voted to hold rates steady and left the federal funds target rate unchanged at 5.25% to 5.5%. The monetary policymaking body emphasized that “the risks to achieving its employment and inflation goals continue to move into better balance” and that the incoming data was providing confidence that inflation was moving towards the Fed’s 2 percent target 1. Current market expectations reflect three or four cuts for the remainder of the year, with a first cut in September 2. (We invite you to read the June 2024 Special Report issued by PFM Asset Management LLC on the Federal Reserve and Rates.)
Here are some considerations for California local government agencies as they position their short-term cash and medium-term fixed income portfolios to navigate a potential decline in interest rates. - Treasury Yields Are Still Above 20-Year Averages. Even though Treasury yields have fallen off of 2023 and 2024 highs, they still may present compelling opportunities for certain agencies and governments to reposition excess liquidity, including checking, money market and local agency investment fund (LAIF) money in fixed income assets to lock in longer-term yields that could be beneficial for cash flows.
- Avoid “Chasing the Tail” of Attractive Overnight Rates. Now may not be an appropriate time to abandon longer-term investment strategies in favor of shorter-term options. Although overnight yields in local government investment pools (LGIP) continue to benefit investors’ liquidity needs with monthly interest, diversification potential and useful overnight liquidity, a shift from longer duration investment strategies to shorter term duration benchmarks may not benefit an agency’s long term cash flows in a falling yield environment. Timing the market to reposition portfolios as the yield curve is expected to fall can be difficult, may introduce greater interest rate risk and might be costly to one’s long-term investment strategy.
- Maintain Investment Strategy Discipline with Commitment to Cash Flows. We believe in remaining disciplined to your agency’s mandate and benchmark selection. Despite the benefit of hindsight in evaluating the largely impressive performance of LGIP and money market assets, it can be difficult to predict the tops and bottoms of markets. As some market participants anticipate that yields may fall and the treasury curve may steepen, it is important to remain committed to your agency’s investment philosophy and to revisit cash flows to help ensure that the size of your invested assets is appropriate to meet budgetary outflows and unexpected disbursements that are needed throughout the fiscal year.
Contact Information:
Justin Resuello
Client Relations Manager
PFM Asset Management LLC
415.854.7852
resuelloj@pfmam.com 1 FOMC Minutes July 30 – 31, 2024 (federalreserve.gov) 2 Source: Bloomberg Finance LLC, as of August 22, 2024.
PFM Asset Management LLC (“PFMAM”) is an investment adviser registered with the U.S. Securities and Exchange Commission and a subsidiary of U.S. Bancorp Asset Management, Inc. (“USBAM”). USBAM is a subsidiary of U.S. Bank National Association (“U.S. Bank”). U.S. Bank is a separate entity and subsidiary of U.S. Bancorp. U.S. Bank is not responsible for and does not guarantee the products, services, or performance of PFMAM.
NOT FDIC INSURED : NO BANK GUARANTEE : MAY LOSE VALUE
Justin joined PFM Asset Management in 2023 after overseeing municipal bonds and public sector banking relationships beginning in 2007. As a relationship manager, he serves public finance and mission-driven organizations' cash and liquidity management, as well as investment policy and management strategies.
Justin was previously responsible for government and not-for-profit commercial banking relationships at JP Morgan Chase; non-profit healthcare underwriting at Wells Fargo; municipal bond investments at Sterne Agee, First Republic Bank and Mechanics Bank; local government credit ratings at Moody's Ratings (previously known as Moody's Investors Service); and featured articles about credit cards, travel rewards, business loans and investing at Forbes. He has presented at the Washington Financial Officers Association (WFOA) and Arizona Association of School Business Officials (AASBO) conferences. Justin earned a Bachelor of Arts degree in Business Management Economics from UC Santa Cruz, a Master of Public Administration from the Maxwell School of Syracuse University and a PPIA Fellowship from Heinz College of Carnegie Mellon University.
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