Newsletter 2022 06-Jun

Quarterly Letter to Members

The Federal Open Market Committee (“FOMC” or “The Fed”) increased the target range for the Federal Funds rate by 0.75% bringing the range to 1.50 to 1.75% at the June 15th meeting. This is the first time since 1994 that the FOMC has raised interest rates by a full 0.75% at a single meeting.

Adjustments were also made to the interest on reserve balances (“IOER”) to 1.65% from 0.90% and the Overnight Reverse Repurchase Agreement program (“ON RRP”) to 1.55% from 0.80%. The ‘surprise’ upside was telegraphed via several key media reports, which appear now to have been credible. It is notable that Kansas City Fed President, Ester George, dissented in favor of a 50-basis point rate hike. This is surprising as she is not normally known as dovish, but this is consistent with the notion there is increasing disagreement of the pace of normalization within the committee.

Within the details of the statement, the biggest highlight is the introduction of the phrase, “the Committee is strongly committed to returning inflation to its 2 percent objective.” The 75-basis point rate hike signaled that commitment. During the press conference, Chair Powell remarked “not to expect 75 basis point hikes to be common”, and that the conversation will be between 50 and 75 basis points at the next meeting as the Fed is looking for compelling evidence that inflation is abating.

The Summary of Economic Projects (“SEP”) showed another dramatic shift higher. In the last set of forecasts from March, there was a sense that the Fed was finally taking responsibility to fight inflation and acknowledging that the relief from transitory pressures won’t be sufficient. The revisions today show a much greater sense of urgency as inflation has accelerated and inflation expectations have shown signs of becoming anchored.

The median federal funds rate dot for 2022 rose to 3.375% from 1.875% in March. In March, the top projection in the distribution was 3.125%. In June, the lowest projections (5 of them) are 3.125%. In December 2021, the median projection was 0.875%. The Fed was firmly behind the curve in their projections for inflation and their policy response, but to their credit they are catching up.

For 2023, the median federal funds rate dot rose to 3.750% from 2.750%. Notably 9 of the 18 dots are at 3.875% or higher, and the highest dot is at 4.375%. The 2024 median federal funds rate dot rose to 3.375% from 2.750%, reflecting a higher policy rate than the March SEP, but also a lower policy rate than the median for 2023. The Fed expects that restrictive policy will put downward pressure on inflation in 2023 and that less restrictive policy will be necessary in 2024 as inflation drifts toward target and the unemployment rate rises modestly.

In sum, the SEP paints a “softish” landing scenario where the economy grows slightly below trend this year and next year, the unemployment rate slowly moves up to non-accelerating inflation rate of unemployment (“NAIRU”) – gets there by 2024 and that’s enough to bring core inflation down to 2.7% next year and 2.3% by 2024. That’s a bit more realistic than the March projections, which were totally unrealistic, but it still seems like a long shot to pull off.

Portfolio Matters

Fund Composition

The month opened with a $464,822,848.74 balance and closed with a balance of $434,490,343.88. The seven-day effective yield ended the month at 1.23%. The monthly seven-day average effective yield for the month was 0.83%. Average maturity ended the month at 4 days.

Comparisons

Money Market Composition

At the end of the month, the AMLIP portfolio had 35% of its portfolio assets allocated to overnight investments/cash, corporate securities made up 3% of the assets, commercial paper represented 29%, CDs represented 8%, and Treasury & Agency represented 25%. On June 27, 2022, the seven-day compound yield of all taxable money market funds as reported by iMoneyNet, Inc. was 1.02%, the Tier 1 Institutional Compound Yield was 1.30% and the Pool’s 7-day effective rate of 1.19% on the same day. All Pool rates are quoted net of fees and expenses

AMLIP Board Members

Terry Eubank – President

City of Kenai

Cheyenne Heindel – Vice President

Matanuska-Susitna Borough

Jody Tow – Treasurer

Petersburg Borough

Nils Andreassen

Alaska Municipal League

Margaret (Peggy) Macdonald

Fairbanks North Star Borough

Kris Erchinger

City of Whittier

Melissa Haley

City and Borough of Sitka

AMLIP Membership

Adak, City of	Eagle, City of	Northwest Arctic Borough
Akutan, City of	Eek, City of	Northwest Arctic
Alaska Association of	Egegik, City of	School District
Municipal Clerks	Elim, City of	Nulato, City of
Alaska Government Finance	Fairbanks North Star Borough	Old Harbor, City of
Officers Association (AGFOA)	Fairbanks, City of	Palmer, City of
Alaska Industrial Development	False Pass, City of	Pelican City School District
Export Authority (AIDEA)	Fort Yukon, City of	Pelican, City of
Alaska Municipal League	Gustavus, City of	Petersburg, City of
Alaska Municipal	Haines Borough	Pilot Station, City of
Management Association	Homer, City of	Pribilof School District
Aleknagik, City of	Hoonah, City of	Quinhagak, City of
Aleutians East Borough	Huslia, City of	Sand Point, City of
AML/JIA	Juneau, City and Borough of	Selawik, City of
Anchorage Community	Kake City School District	Seldovia,City of
Development Authority	Kenai Peninsula Borough	Seward, City of
Anchorage, Municipality of	Kenai, City of	Sitka, City and Borough of
Angoon, City of	Ketchikan Gateway Borough	Soldotna, City of
Annette Islands School District	King Cove, City of	Southeast Conference
Atka, City of	Kodiak Island Borough	Southwest Alaska Municipal
Atqasuk, City of	Kodiak, City of	Conference
Barrow, City of	Kotzebue, City of	St. Paul, City of
Bethel, City of	Koyuk, City of	Tenakee Springs, City of
Brevig Mission, City of	Manokotak, City of	Toksook Bay
Bristol Bay, Borough of	Marshall, City of	Unalakleet, City of
Chevak, City of	Matanuska-Susitna Borough	Unalaska, City of
Chuathbaluk, City of	McGrath, City of	Upper Kalskag
Cold Bay, City of	Mekoryuk, Village of	Valdez, City of
Cordova, City of	Nenana, City of	Wasilla, City of
Delta Junction, City of	New Stuyahok, City of	Whittier, City of
Denali Borough	Nightmute, City of	Wrangell, City and Borough of
Dillingham, City of	Nome, City of	Yakutat, City and Borough of
	North Slope Borough
	School District