Fed Outlook for 2025

Heather: Welcome back to another episode of Treasury Market Minute. I'm Heather Froehlich, National Sales Manager of State Treasury Pools for Federated Hermes. Today with me I have Sue Hill, senior vice president, senior portfolio manager and head of our government liquidity group here at Federated. So Sue can you talk to us a little bit about Fed fund futures and where you believe rates are headed in 2025?

Sue: Happy to Heather so I think as you know I am a seasoned veteran in the liquidity markets and have been at Federated Hermes for quite some time now but it's never a dull moment in in the liquidity markets in the past couple of months have really proven that once again so from the federal reserve's perspective we've had some pretty significant changes in terms of overall expectations from the Fed just since the end of last year because I think as you recall that the Fed had been easing interest rates starting in September of last year and had eased by a cumulative 100 basis points from September where rates were five and a quarter to five and a half percent down to

four and quarter to four and a half percent where we ended the year this year however your significant uncertainties that the Fed faces in particular with respect to the incoming administration policies which I think has put the Fed on the sidelines for a period of time until they get a little bit more clarity as to what trade policies how trade policies might impact inflation how immigration policies and other policies out of the administration might impact the growth side of the equation for the Fed so on the slide in front of you you do see expectations of where the policy rate might be in 2025 and the change from where it was or where expectations were at the end of September of last year and as we look forward over 2025 the market really shows just a mere 25 to 50 basis points of additional policy easing in 2025 versus what had been expectations

of almost 100 to 150 basis points not all that that long ago so why is the Fed you know on the sidelines again significant uncertainty with respect to overall policy and it's easiest for me to look at it when you think in terms of the fed's dual mandate so again on the screen in front of you, you can see the two sides of what the Fed has to balance the time one side being price stability or in intent for them to get inflation back down to a 2% target and they've made some progress with respect to you know from since the pandemic and getting to that point but they still have some ways to go the right side of their dual mandate or the right side on the screen you see the desire for the Fed to maintain maximum employment right so they've been watching the labor market and how the labor market has been performing and they have the responsibility to balance both inflation and the health of the economy in terms of overall employment and so as the Fed stands today they don't really know what this balance is going to look like in the next couple of months right there's things with the trump administration policies with

respect to trade that could increase price pressures there are things with respect to immigration or the department of government efficiency layoffs and firings that could affect the employment side of their mandate so until they know better what they're dealing with I think they'll just stay on the sidelines for a period of time until really the skies are clear.

Heather: Well Speaking of the Fed can you walk us through the current FOMC and any key changes to voting members either recent or upcoming?

Sue: Sure so it's been a big topic of discussion about fed independence coming into the new administration so president trump has historically taken levied some criticism against fed chairman Powell in the prior administration and the two were you know a little bit of back and forth during that time so we expect that to happen again you know today or in the new the new term of the administration but both of them have been here before so I think a lot of it will be just headlines and jockeying back and forth in terms of that the president would like to see in terms of fed policy and what fed chair Powell would like to do with respect to the Fed so I think a lot of that would be noise I do look every year at the incoming shifted FOMC members right so the FOMC the voting members of the FOMC they're 12 members that that vote at each at each policy meeting five of those are Federal Reserve Bank presidents and four of those bank presidents rotate every year the remaining

FOMC members are Federal Reserve governors so those are seven of those and they remain voting every year so a pretty good idea of the Fed governor stance but if you look again in the slide on the screen the rotating members of Federal Reserve Bank presidents we've had four rotate off and four rotate on this year at the end of the day though I don't think there's a significant change in terms of policy leaning whether it's more dovish or hawkish it's actually a fed that right now again being on the sidelines is kind of centrist so I don't think there's a significant change with the overall shift but it's just worth watching just to see whether one member has you know stronger views then you know and then we expect

Heather: Well in using all of this as a backdrop what does this ultimately mean for the liquidity markets and maybe more specifically for local government investment pools?

Sue: So if you again look at the graph on the screen it looks like you know some toddler took crayons and drew kind of lines across the page you do see it's really a representation of kind of the shifting fed policy that we're seeing so you at one point in time thought the Fed was going to ease dramatically and you can see that with the inverted curve the low line on this particular page is the one year T bill the yield on the one year treasury bill and it's significantly inverted when we're looking at that August of September time period and then you know things calm down a bit and the Fed was a little less concerned about the economy in general and now we're more towards that price towards that gradual type of movement and you can see that with all of those yields kind of clustered around what we think is the representation of the overnight rate for all the securities So what we do during that time. How we mitigate any yield influences on the pools is really make relative value decisions as compared to what's available in the market

so to the extent that the markets pricing in a really aggressive fit but we don't believe that then we may be more inclined within our pool management to sit on the sidelines and overnight investments however when we got to early this year we started to find a little bit more value in the market with less fed easing priced in and have been able to extend our average maturities with yields of securities that you know that look relatively attractive to us so to the extent that the Fed does ease those purchases of securities could help to help to at least soften any downward movement in overall rates but make no mistake about it pool yield are designed to track movements and short term money market securities and as a result we would expect opposed to adjust to changes in monetary policy but the good news is with less fed easing priced in we expect generally speaking money market yields to remain predictable.

Heather: Thanks sue well this concludes today's episode of treasury market minute we really appreciate your time today we look forward to connecting with you soon.