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MONEY MARKET | February 2023

Taxable Money Market

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John Tobin

John Tobin

Chief Investment Officer

At the February 1, 2023, Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) raised the federal funds target range by 25 basis points (bps) to 4.50% – 4.75%, as expected. While there were no material changes to the post-meeting statement, the committee stated that they expect “ongoing increases” to policy rates. The FOMC Summary of Economic Projections (SEP) dots were not updated at this meeting; however, the dot plot from December points to a terminal federal funds rate of 5.13%. The SEP will be updated at the March FOMC meeting. Currently, markets are pricing in an additional 25 bps hike at both the March and May FOMC meetings. At the post-meeting press conference, Chair Powell stated, “We can now say, I think, for the first time that the disinflationary process has started. We can see that.” Overall, the market took the statement and press conference to be dovish and market rates moved lower.

February’s unemployment rate rose to 3.6%, up 0.2% from the 54-year low number released the prior month. Nonfarm payrolls increased by 311,000 in February versus 517,000 in January, marking the eleventh straight month that job growth has exceeded expectations. The labor force participation rate edged up slightly to 62.5% from 62.4% the prior month. Gains in employment were widespread among several industries. The leisure and hospitality industry lead with job gains of 105,000. Monthly average hourly earnings growth dropped slightly to 0.2%, which corresponds to a year-on-year increase of 4.6%.

February’s headline consumer price Index (CPI) rate of 6.4% was down 0.1% from the prior month, and down from last quarter’s 8.2%. While energy and vehicle prices continued to decline, some sectors have remained stubbornly elevated such as rents and service sector wages. Owners’ equivalent rent is likely to remain high as cooling home prices will take time to pass through to the rent component. Core CPI, which excludes the more volatile components such as food and energy, decreased to 5.6% year-over-year from 5.7% last month.

Fourth-quarter 2022 real GDP rose 2.7%, down from 2.9% in the prior quarter. Consumer spending, the largest component of GDP, rose 1.4% pace this quarter, down from 2.1% the prior quarter. Regarding recessionary indicators, most of the key statistics that the National Bureau of Economic Research (NBER) analyzes have shown positive increases over the last six months, such as nonfarm payroll employment and real consumer spending.

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