In Brief

• On May 5, the Federal Open Market Committee (FOMC) unanimously raised its Federal Funds Rate target range by 50 basis points (bps) to 0.75%-1.0%. This was the largest single meeting increase since 2000.
  
  
• The Federal Reserve (Fed) remains committed to raising rates “expeditiously” to bring down inflation, which is running at its quickest pace since the 1980s. However, the central bank’s future policy path has not been set in stone and remains adjustable to the changing landscape.
  
  
• Quantitative Tightening (QT) is expected to begin in June with assets rolling off at a pace of $47.5bn per month, potentially reaching a peak of $95bn per month. We believe the initial impact of QT on the money market space will be negligible.


• Global Liquidity portfolios are well-positioned to capture the uplift in overnight rates and stand to benefit from steep curves and aggressive expectations for Fed tightening.

May FOMC highlights

The FOMC met market expectations for a 50bps increase to its target range, which now stands between 0.75% and 1.00%, and raised the Interest on Reserve Balances (IORB) and the overnight Reverse Repo Rate (RRP) by the same amount to 0.90% and 0.80% respectively.

The Fed broke the mold of the previous two hiking cycles and chose to raise rates by the single largest amount since 2000. The Bank’s future policy path has not yet been set in stone and the door has been left open to adjust to the changing landscape. However, inflation is at its highest level since the 1980s, and the Fed remains highly attentive on inflation risk, stating that it wants to get to neutral expeditiously and even beyond if necessary.

When asked about future policy path during the press conference, Chairman Powell continued to stress being nimble. Ultimately, the Fed wants to maintain flexibility. However, Powell did state that a larger 75bps hike is not currently being considered by the Committee, and that incremental 50bps hikes are on the table for the next couple of meetings.

Markets reacted to these statements, pricing out the probability of 75bp hikes at one of the next two meetings. Ahead of the press conference, market estimates for future rate moves continued to get more aggressive (fig1.) and had at one point priced in a 40% chance of a 75bp rise. The belief was that the Fed was potentially falling behind the curve and needed to be even more aggressive in order to clamp down the hottest inflation in the last 40 years. However, Powell’s comments suggested that there is some evidence that inflation may have peaked and this is perhaps why he signaled 50bp moves for the next two meetings rather than something even more aggressive.

As for the remainder of the year, the market expects between seven and eight additional 25bps hikes, which would take us beyond the Fed’s current median neutral rate estimate of 2.38% by year-end.

Figure 1: Fed Fund Futures implied overnight rate time series

Source: Bloomberg, as at 5 May 2022.

On the balance sheet, the Fed chose to begin QT in June with assets rolling off at a pace of $47.5bn a month ($30bn treasuries and $17.5bn mortgages) and after three months will peak at $95bn a month ($60bn treasuries and $35bn mortgages). This is faster than the last QT, which reached a peak of $50bn a month ($30bn treasuries and $20bn mortgages). The initial impact on money market rates should be minimal. Treasury bills will only roll off to the extent the monthly treasury cap is not reached through maturing Treasury coupon securities. Also, demand for short term product remains high while relative supply is low, which is illustrated by elevated RRP balances above $1.8 trillion. In the interim, it is likely these driving factors will prevent short term money market rates from leaking higher within the Fed’s target range.

Investors Implications

We believe money market investors should welcome a series of increases in rates and steep Fed trajectory. The short average maturity of money market funds, due in part to the substantial positions held in overnight to one week maturities, allows for funds to quickly reset a significant portion of their portfolio higher. As a result, Global Liquidity portfolios could be well-positioned to capture the uplift in overnight rates and stand to benefit from steeper curves, wider spreads, and continued tightening by the FOMC.

Source for all data is J.P. Morgan Asset Management as at May 5 2022, unless otherwise stated.

This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations.] The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities: In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be; in Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. Copyright 2022 JPMorgan Chase & Co. All rights reserved.

09ct220905144918