17607_PMAA_Authority_June_2024

municipalauthorities.org | 29 H olding S teady Some Considerations for Local Governments in a Stable Interest Rate Environment By Katia Frock, Senior Marketing Representative, PLGIT In an echo of an earlier decade, local governments navigated near-zero interest rates from March 2020 to early 2022 as the U.S. economy wrestled with the COVID-19 pandemic. In a very different scenario, managers in municipalities watched the Federal Reserve Board’s Open Market Committee (FOMC) raise target interest rates 11 times from March 2022 to July 2023 to slow the rise of inflation while not impeding economic growth. As a result, short-term interest rates steadily climbed to a peak of 5.5%. Fast forward to today: at its meeting in late January 2024, the FOMC signaled its intention to end its cycle of increasing rates hiking, but also resisted cutting rates at that time, projecting instead a plan to potentially cut short-term Fed funds rate by 75 basis points by the end of 2024. 1 In an official release following January’s meeting, the FOMC stated that “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two percent.” 2 The end result has been a rare and relatively stable short-term interest rate environment. These changes have presented an unusual set of circumstances for local governments, who have spent the last several years assessing options for what to do when interest rates are dropping or spiking. Now, as interest rates appear to be holding steady, and at a favorable rate, local governments are faced with an important question: what are our smartest investment choices? Should we lock into current investments? Should we keep funds liquid for new opportunities? What A Local Government Should Know As investors of public funds weigh their choices, they could benefit by doing a quick self-assessment before making any major decisions. Here are a few suggestions: Go back to basics - Whether or not markets or rates are moving up or down — or not at all — it’s a good idea to look at your local government’s guiding investment policy and engage in a careful review of your current cash flow and investment needs. In fact, this is precisely why every municipality should create a longer-term plan for investment: it provides a sound, well- reasoned foundation for making decisions during all types of investment market change. 1 Federal Reserve, Bloomberg 2 US Wealth Management. “Federal Reserve focuses monetary policy on fighting inflation” February 1, 2024 Continued on page 47.