Don’t fight the FRED

The Federal Reserve should let incoming economic data determine whether to hold rates higher for longer or deliver another hike, while money-market yields remain attractive.

• In September, the FOMC raised its target range to 3.75%-4.00% because inflation remained above the 2% target despite pressure from the White House, bond markets and consumers.
• The Crane Data 100 Money Fund Index had reached 3.67%, and the author expects liquidity yields to rise further even without another Fed hike.
• Futures pricing implied at least one additional hike, potentially in October or December, but oil flows, trade wars and supply-chain changes could give the Fed room to pause.
• The September Summary of Economic Projections showed 12 of 18 participants expecting another 25-basis-point increase, while the dot plot suggested possible rate cuts in 2027.
• Japan’s central bank had raised its benchmark to 1.25% after two hikes, yet Japanese banks still reported adequate capital and liquidity, while repo markets are preparing for the U.S. Treasury clearing mandate taking effect on June 30, 2027.

Takeaway: Cash managers can continue to benefit from elevated liquidity yields, but investors should not assume a mechanically repeated hiking cycle because weakening consumer sentiment, borrowing costs and financial-market stability could justify a pause.