2020 1st Quarter Cash Management Commentary
In our January Commentary, we noted that the Fed had dropped short-term interest rates in late-2019 in three distinct quarter point increments to the year-end level of 1.50-1.75%. As the coronavirus spread around the world in early-2020, the central bank cut interest rates on March 3 by half a percentage point, its biggest single cut in more than a decade. When that did little to stem the tide of business and stock market decline, the Fed became even more aggressive. At an emergency Sunday meeting, the Fed took away the last full percentage point on March 15, reducing the federal funds rate to 0-0.25% and matching the low maintained for years following the Financial Crisis.
With rates again at the zero bound, our decision over the past several years to invest in multi-year government-guaranteed CDs has provided our cash management clients with far above market returns. By negotiating minimal prepayment penalties with each CD issuer, we have protected portfolios against a surprise rate increase. While that does not look likely in the very short run, the Fed is pumping so much newly created money into the economy that a rapid escalation of inflation cannot be ruled out.
In the meantime, we continue to shop for acceptable CD rates while working daily to maximize risk-free return among short US Treasury bills, government-guaranteed money market funds and Mission’s Insured Deposit Program.
By Thomas J. Feeney, Chief Investment Officer
