KPMG’s senior economist Ken Kim recently sat down with CMLI to discuss his thoughts on what Treasurers and other cash management leaders could consider investing in following the Fed’s decision to leave interest rates unchanged.
“I don’t think there’s any sea change required in terms of cash management,” Kim tells CMLI. “Do what you’ve been doing.” He adds: “You know you can get a good return just staying at the short end of the curve.”
The market consensus is, as of mid-June, that the Federal reserve will only cut rates once this year — in either September or December. Kim suggests looking at the monthly Personal Consumption Expenditures price index report and jobs reports to anticipate if the Fed may change course sooner than later.
CMLI: What’s your thinking on what Treasurers should consider investing in now?
With interest rates not expected to fall soon, it may be wise for Treasury and cash management leaders to continue to invest in short maturities. There is little need to take duration risk with short-term rates as high as they are. At some point, later this year, it might be prudent to invest further out along the yield curve once it’s clearer when the Federal Reserve might start cutting rates. That may take some time in our opinion.
Despite the differing scenarios presented for Fed policy, the answer boils down to the same. Treasury and cash management leaders should likely continue to look towards investing in high quality, short-term, fixed income maturities in the near term of the next six months or so.
CMLI: Do you think the Fed will lower rates?
We believe only one rate cut will take place this year in December. Recent market expectations have oscillated between 1-2 rate cuts, occurring in September and/or December 2024.
The Fed has a bias to overtighten. The worst mistake a central bank can make is to cut interest rates only to have to reverse course and raise them again. History is littered with examples of when central banks eased to satisfy the whims of politicians and lower unemployment. Fed Chair Jay Powell and the Federal Open Market Committee intend not to make that mistake.
For treasury and cash management leaders, it is critical that they embrace a management approach. Therefore, one also must consider risks to the other side, even as inconceivable as they may seem now, which is an increase in interest rates by the Fed.
CMLI: What would prompt the Fed to hike?
A failure of inflation to improve after the recent run-up. If wages do not cool with the drop in job quits and/or get offset by a jump in productivity growth, the Fed will have to put rate hikes back on the table. Still, we consider the hurdle to tighten monetary policy as being much higher than that for rates being lowered.
A potential rise in interest rates also suggests that sticking with short maturities may be a prudent and optimal choice. This provides the option to roll over maturing short issues into new higher yielding assets if indeed the federal funds rate target moves higher.
CMLI: What are your thoughts on investment options for Treasurers and Cash managers in the next six months?
Despite the differing scenarios presented for Fed policy, the answer boils down to the same. Treasury and cash management leaders should likely continue to look towards investing in high quality, short-term, fixed income maturities in the near term of the next six months or so.
