Macroeconomic and Interest Rate Outlook

Transcription

1 Macroeconomic and Interest Rate Outlook 217 Agricultural Lenders Conference Brian C. Briggeman Professor and Director of the Arthur Capper Cooperative Center The economic recovery appears to be finding its footing and stabilizing above 2% annualized growth. Annualized percent change from previous quarter Real GDP Growth (United States) WSJ Forecast (Sept.) :Q1 213:Q2 213:Q3 213:Q4 214:Q1 214:Q2 214:Q3 214:Q4 215:Q1 215:Q2 215:Q3 215:Q4 216:Q1 216:Q2 216:Q3 216:Q4 217:Q1 217:Q2 217:Q3 217:Q4 218:Q1 Source: Bureau of Economic Analysis and Wall Street Journal (WSJ) September 216 Forecast Survey (Average)

2 The labor market has improved. Percent U.S. Unemployment Rate Shaded areas denote recession Index (1966=1) University of Michigan: Consumer Sentiment Jan 78 Jan 81 Jan 84 Jan 87 Jan 9 Jan 93 Jan 96 Jan 99 Jan 2 Jan 5 Jan 8 Jan 11 Jan 14 Jan 17 Source: Bureau of Labor Statistics Jan 78 Jan 81 Jan 84 Jan 87 Jan 9 Jan 93 Jan 96 Jan 99 Jan 2 Jan 5 Jan 8 Jan 11 Jan 14 Jan 17 Source: University of Michigan Consumer Sentiment Index Improvements in the overall U.S. economy are finally reducing a historically deep and wide output gap. (Actual Real GDP Potential Real GDP) Potential Real GDP % Output Gap -1% -2% -3% -4% -5% -6% -7% -8% Jan-49 Jan-51 Jan-53 Jan-55 Jan-57 Jan-59 Jan-61 Jan-63 Jan-65 Jan-67 Jan-69 Jan-71 Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 Source: Congressional Budget Office

3 Today s inflation is well below 197s levels Personal Consumption Expenditures Price Index Percent change from previous year 14% 12% 1% 8% 6% 4% 2% % 2% PCE Price Index (Headline) Jan 71 Jan 73 Jan 75 Jan 77 Jan 79 Jan 81 Jan 83 Jan 85 Jan 87 Jan 89 Jan 91 Jan 93 Jan 95 Jan 97 Jan 99 Jan 1 Jan 3 Jan 5 Jan 7 Jan 9 Jan 11 Jan 13 Jan 15 Jan 17 Source: Federal Reserve Economic Data, Federal Reserve Bank of St. Louis PCE Price Index Excluding Food and Energy (Core) and inflation expectations are low and continue to remain below the 2% target.

4 Today s exceptional accommodative monetary policy has created quite the dialogue within the Fed. In the Fed, it is a debate between: Doves: Benefits of continued accommodative monetary policy to the economy outweigh the risk (international turmoil and deflation) Hawks: The economy continues to improve and extraordinary accommodative policies may be promoting excessive risk taking behavior The market continues to prepare for a Fed Funds rate increase June 215 Who will be the next Fed Chairman? Janet Yellen Current Fed Chair dove Neel Kashkari Minneapolis Fed President dove Kevin Warsh Former Fed Governor dove as a governor but hawk by reputation Gary Cohn Chief Economic Advisor to President Trump investment banker (dove? hawk?) Someone else?

5 With an improving economy, the FOMC did raise rates in December 215. Percent 2 Effective Fed Funds Rate Shaded Areas are Recessions Jul-54 Jul-59 Jul-64 Jul-69 Jul-74 Jul-79 Jul-84 Jul-89 Jul-94 Jul-99 Jul-4 Jul-9 Jul-14 Source: Federal Reserve Board of Governors The March 217 FOMC dot plot shows future interest rates rising significantly but will they?

6 How accurate has the FOMC been in predicting the effective fed funds rate? FOMC Dot Plot Average Annual Federal Funds Rates Average Midpoint of Target Federal Funds Rate Release Date for FOMC Projection of Federal Funds Rate Source: Federal Reserve Board of Governors Projected longer run Federal Funds Rate has steadily declined. 4.5 FOMC Longer Run Average Annual Federal Funds Rate Average Midpoint of Target Federal Funds Rate Release Date for FOMC Projection of Federal Funds Rate Source: Federal Reserve Board of Governors Longer Run

7 What are the implications of a Fed created positive spread? Shorter end of the yield curve is being held down by accommodative policy so: Why not reach for yield? Why not use cheap short term funds to lower longer term loan rates? Why lock in longerterm rates? Why should I miss out on the party? Through quantitative easing, the Fed has pumped massive amounts of liquidity into the marketplace. Billion Dollars 5, 4,5 4, 3,5 3, Fed Agency Debt Mortgage Backed Securities Purchases Liquidity to Key Credit Markets Lending to Financial Institutions Long Term Treasury Purchases Traditional Security Holdings 2,5 2, 1,5 1, 5 9/5/27 1/5/28 5/5/28 9/5/28 1/5/29 5/5/29 9/5/29 1/5/21 5/5/21 9/5/21 1/5/211 5/5/211 9/5/211 1/5/212 5/5/212 9/5/212 1/5/213 5/5/213 9/5/213 1/5/214 5/5/214 9/5/214 1/5/215 5/5/215 9/5/215 1/5/216 5/5/216 9/5/216 1/5/217 5/5/217 Source: Federal Reserve Bank of Cleveland

8 Shiller PE Ratio Is the stock market a bubble? NYSE Member Firms Debit Balance in Margin Debt Agricultural interest rates are holding steady, but for how long? Interest Rate (Percentage) Operating (Fixed Rate) Real Estate (Fixed) Bank Prime Loan Rate Source: Federal Reserve Bank of Kansas City and the Federal Reserve Board of Governors

9 What do low, long term interest rates mean for U.S. agriculture? The decline in farmland values should be slow and measured more of a leveling off Should help lower the value of the US dollar, which would generally help exports but that is not happening why? Keep debt costs low definitely more relevant in today s tight margin environment With depressed net farm incomes and the prospects of a rise seemingly bleak, could low, long term interest rates stave off a 198s type bust? Thank you. Questions? 217 Agricultural Lenders Conference Brian C. Briggeman Professor and Director of the Arthur Capper Cooperative Center