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Money Market Fund —
Expectations for monetary tightening have returned
3rd Quarter, 2016
"We believe that the pace of monetary policy tightening will remain slow and that U.S. interest rates are likely to remain low in this protracted recovery. "
– Fischer Francis Trees & Watts, Inc.

Global fixed income markets recovered from Brexit related market turbulence throughout the summer months. Global government yields remained low despite a broad based recovery in risky assets. Market focus turned from Brexit to global monetary policy as markets began to assess the limitations of central bank stimulus efforts going forward.
U.S. markets slowly rebounded in the months following the referendum. Expectations for a potential tightening of U.S. monetary policy returned after a strong June employment report. Divisions among policymakers emerged at the September Federal Open Market Committee (FOMC) meeting, with three voters calling for a tightening of monetary policy. Markets are currently forecasting a 60% probability of a 25 basis-point increase in the target rate at the December FOMC meeting. Economic data was mixed throughout the quarter, with stronger labor sector data but weaker manufacturing data. U.S. 10 year notes ended the third quarter at 1.60%, a modest increase from the lows reached in late June.
Against this backdrop, the Harbor Money Market Fund returned 0.10% for the third quarter of 2016. The return matched the 0.10% return of its benchmark, the BofA Merrill Lynch U.S. 3-Month Treasury Bill Index after fees. Portfolio returns benefitted from excess yield associated with agency discount notes. Duration and yield-curve positioning modestly contributed to performance.
Comments by Fischer Francis Trees & Watts were made in an October, 2016, report. Highlights adapted from the report appear below. All comments relate to the quarter ended September 30, 2016, unless otherwise indicated. All references to the year-to-date are for the period January 1 through September 30, 2016.

Interview Highlights

Monetary Policy
Expectations for additional Fed tightening in the 2016 calendar year increased in the third quarter as economic data improved and global market turbulence subsided. The Fed is likely to proceed slowly in removing policy accommodation, with the next move expected in December 2016. The risk of a need to reverse course and increase stimulus remains elevated given the anemic recovery. Swings in investor sentiment continue to impact markets, and we would not be surprised if another event derails Fed tightening discussions in the coming quarter.
Inflation Expectations
Our expectations for U.S. inflation were unchanged during the quarter. We continue to expect a modest drift toward the 2% target over a protracted period of time. The view depends largely on the emergence of wage pressures from a continually tightening labor sector.
A More Pessimistic Economic Outlook
We became more pessimistic, on the margin, during the current quarter in response to softer economic data and elevated populist political risk around the globe. A significant improvement in economic data would be required to reverse this shift in sentiment. The global economic environment has become increasingly unsettled, limiting the ability of the U.S. economy to successfully decouple and return to a self-sustaining growth path. We recognize that neutral policy rates are likely much lower than in the past, and that U.S. trend growth has probably declined to 1.8%. In our view, while the economy may well exceed trend growth in the coming year, a return to 3% growth rates in the near term is unlikely.

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