The Morning Ledger: Money Markets Weaken the Fed’s Grip on RatesBy James Willhite |
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Good morning. CFOs have been toggling their corporate cash allocations to reflect an expectation that rates will stay low. But now they must consider—when the Fed does choose to raise rates, will it be able to? Surging levels of cash in U.S. money markets threaten to undermine the Federal Reserve’s control over short-term interest rates, the WSJ’s Katy Burne reports. The Fed’s benchmark federal-funds effective rate, the daily average rate charged on overnight loans between banks, has fallen sharply at the ends of recent months. The declines have been caused by financial institutions boosting their holdings of cash ahead of financial-reporting deadlines, reducing demand for loans in the fed-funds market. The declines underscore the challenges the Fed could face when it eventually raises rates in markets that have experienced dramatic changes since the financial crisis. If the central bank can’t manage interest rates effectively, it would lose control of a key lever that shapes economic and financial activity. The expectation among corporate treasurers that the Fed will hold off on even trying to raise rates, or will do so extremely slowly, hasboosted corporate cash allocations to corporate bonds. “The belief that the Federal Reserve will raise rates once and be done in the coming months, or that the timeframe for the Federal Reserve hike has been pushed back to ! March dominates the market,” said Phil Bartlett, a senior portfolio manager at Clearwater Advisors. “This belief has led corporate treasurers, who have no immediate liquidity needs, to push their investments into longer duration assets, such as corporate bonds.” View Clearwater’s complete data set in CFO Journal’s new interactive graphic. |
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