Newsletter 2022 03-Mar

Quarterly Letter to Members

The Federal Open Market Committee (“FOMC” or “The Fed”) increased the target range for the Federal Funds rate by 0.25% bringing the range to 0.25 to 0.50%. The IOER (“Interest in Excess Reserves”) was raised by 0.25 basis points as well as the RRP (“Reverse Repurchase Program”). The sole dissenter was resident hawk, James Bullard, who clearly was in favor of a 0.50% move.

At this point, it is safe to assume that the Fed intends on hiking at every meeting between now and Q2 2023 and bringing policy to the projected terminal level that is notably above the longer run projection of 2.4%. Within the statement, “we see the invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.” This is very consistent with the Fed’s emphasis on inflations and the impressive hawkish pivot seen over the last several months.

The statement did not provide specific guidance on the pace of tightening, instead projecting “appropriate firming in the stance of monetary policy” and an expectation that inflation “returns to 2.0%” and that the labor market “remains strong.” The language discussing the factors determining appropriate policy was unchanged. The statement also noted that the FOMC “expects to begin reducing its balance sheet at a coming meeting.” Chairman Powell noted that they are finalizing Quantitative Tightening (“QT”) plans, which could be detailed in the upcoming meeting minutes and an announcement as soon as May.

The Summary of Economic Projects (“SEP”) showed another seismic shift as policymakers finally took on the responsibility to fight inflation, acknowledging that the relief from transitory pressure won’t be sufficient. The median dot for 2022 rose to 1.875% from 0.875%, reflecting seven total rate hikes for the year. The December SEP consensus was clustered around two or three rate hikes this year, but now is a minimum of five.

For 2023, the median dot rose to 2.750% from 1.625%, reflecting three to four additional rate hikes during that year. Notably, the highest dot is at 3.625%. The 2024 median dot rose to 2.750% from 2.125%, reflecting no more hikes from 2023, but three or four more than the December 2021 forecast. By year-end 2024, this SEP reflects 10-11 total rate hikes over the period, inclusive of today’s move. Notably, there are two dots at the bottom-end of the range (2.125%) compared with one dot at that level in 2023. This suggests that at least one and possibly two policymaker’s built-in some easing in 2023, bringing rates down from the peak.

Long-run expectations were revised down somewhat as the media fell to 2.3125% from 2.500%. In so doing, they are saying that their 2023 and 2024 median expectations are even further above neutral than had previously been the case. The FOMC obviously had to make a significant upward revision in the trajectory of the dots in this SEP and they certainly delivered. Any question of the Fed’s willingness or ability to combat elevated consumer prices has been answered as the March FOMC meeting was a Fed credibility-enhancing event in terms of fighting inflation.

The Fed has sealed the fate of the yield curve as further flattening occurred after the statement and SEP were released. 5’s30’s break evens dipped to 25 basis points as 2’s/10’s fell to 20.7 basis points. Chairman Powell left open the possibility to move more aggressively and noted that balance sheet reduction details will be presented in an upcoming meeting. This reinforces a flattening bias with the yield curve and the expectation for inverted curves will only grow as the rate hiking cycle plays out.

Portfolio Matters

Fund Composition

The month opened with a $517,422,106.44 balance and closed with a balance of $487,517,817.64. The seven-day effective yield ended the month at .01%. The monthly seven-day average effective yield for the month was .01%. Average maturity ended the month at 9 days.

Comparisons

Money Market Composition

At the end of the month, the AMLIP portfolio had 31% of its portfolio assets allocated to overnight investments/cash, corporate securities made up 2% of the assets, commercial paper represented 37% CDs represented 8%, and Treasury & Agency represented 22%. On March 31st, the seven-day compound yield of all taxable money market funds as reported by iMoneyNet, Inc. was 0.2%, the Tier 1 Institutional Compound Yield was .19% and the Pool’s 7-day effective rate of .02% 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