Today's FOMC statement: how the language changed from prior meeting

Transcription

1 Trend Macrolytics, LLC Donald Luskin, Chief Investment Officer Thomas Demas, Managing Director Michael Warren, Energy Strategist Data Insights: Federal Reserve Wednesday, November 1, 2017 Today's FOMC statement: how the language changed from prior meeting September 20November 01, 2017 Federal Reserve issues FOMC statement Information received since the Federal Open Market Committee met in JulySeptember indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have remainedat a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in recent months, andpayroll employment in September, the unemployment rate has stayed lowdeclined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation and the measure excludingin September; however, inflation for items other than food and energy pricesremained soft. On a 12- month basis, both inflation measures have declined this year and are running below 2 percent. Marketbased measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. StormHurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Higher prices for gasoline and some other items in the aftermath of the hurricanes will likely boost inflation temporarily; apart from that effect, inflationinflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. Copyright 2017 Trend Macrolytics LLC. All rights reserved. This document is not to be forwarded to individuals or organizations not authorized by Trend Macrolytics LLC to receive it. For information purposes only; not to be deemed to be recommendations for buying or selling specific securities or to constitute personalized investment advice. Derived from sources deemed to be reliable, but no warranty is made as to accuracy.

2 In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. In October, the Committee will initiate thethe balance sheet normalization program describedinitiated in the JuneOctober 2017 Addendum to the Committee's Policy Normalization Principles and Plansis proceeding. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell; and Randal K. Quarles. Source: FOMC, TrendMacro analysis 2

3 Fedspeak regime change: the evolution of forward guidance 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% "Considerable period" "Patient" "Measured" Funds rate target Core PCE inflation "Some time" "Extended period" UE Rate "To mid-2013" "To late 2014" "To mid-2015" "Till UE 6.5%" 0% Considerable period "Well past 6.5%" Patient Further improvement Some further improvement Yellen Rule 38 words 44 words Source: FOMC, Federal Reserve, BLS, BEA, TrendMacro calculations Other voices: number and direction of FOMC decision dissents Source: FOMC, TrendMacro calculations 3

4 0.38% 0.38% 1.00% 0.95% 1.00% 0.95% 1.24% 1.25% 1.14% 1.14% 1.07% 1.40% 1.25% 2.36% 2.51% 2.30% 2.40% 2.14% 2.43% 2.14% 2.41% 2.86% 2.95% 2.95% The dual mandate: garbage in, garbage out Unemployment rate Trend from peak Core PCE inflation YOY Trend from trough 11% 10% 9% 8% 7% 6% 5% Inflation trend 1.59%, Sep % "Full employment" range 4.7% to 5.8%, Sep % 1.0% 4.22% 4% % Source: BLS Current Population Survey, TrendMacro calculations So many policy rules, so little time As of August 22, 2017 Based on inputs from: FOMC Summary of Economic Projections Congressional Budget Office Cleveland Fed Actual (midpoint), 1.13% Source: Cleveland Fed, TrendMacro calculations 4

5 Estimating the natural rate of interest Actual funds rate Neutral real funds rate (headline PCE) Neutral (core) Recession +20% +15% +10% +5% % Jan 12 Apr 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Source: San Francisco Fed, Federal Reserve, BEA, TrendMacro calculations R-star the ultimate "dotplot" FOMC participants' estimate of longer run target fed funds rate Vote by individual participant Weighted average Taylor Rule rate based on participants' core PCE and UE estimates 5.0% 4.5% 4.0% 3.5% 3.0% Source: Federal Reserve, TrendMacro calculations 5

6 <-- Downside risk Upside risk --> <-- Downside risk Upside risk --> <-- Downside risk Upside risk --> <-- Downside risk Upside risk --> The evolution of uncertainty Diffusion indices from FOMC participants risk self-assessments in Summary of Economic Projections March FOMC December FOMC June FOMC September FOMC Core PCE September FOMC PCE <-- Less risk to forecast More risk to forecast --> <-- Less risk to forecast More risk to forecast --> UE GDP <-- Less risk to forecast More risk to forecast --> <-- Less risk to forecast More risk to forecast --> Source: Federal Reserve Board, TrendMacro calculations 6

7 Tracking the "dotplots" year by year FOMC participants' estimate of "appropriate" target fed funds rate Vote by participant Average For year-end % 4.0% 3.5% 3.0% 3.54% 3.50% 3.18% 3.00% 2.64% 2.41% 2.04% 1.63% 1.37% 1.40% 1.38% 1.33% 1.5% 1.0% 0.5% 1.31% 0.0% Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 For year-end % 4.0% 3.5% 3.0% 3.34% 3.16% 2.95% 2.46% 2.11% 2.20% 2.32% 2.23% 1.5% 2.08% 1.0% 0.5% 0.0% Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 For year-end % 4.0% 3.5% 3.0% 2.65% 2.80% 2.89% 2.85% 2.75% 1.5% 1.0% 0.5% 0.0% 7

8 Forecast versus actual: economic projections of the FRB and the presidents Forecast Actual Unemployment 11% 10% 9% 8% 7% 6% 5% 4% Core PCE inflation 1.5% 1.0% 0.5% Real GDP 5% 4% 3% 2% 1% 0% -1% -2% Source: Federal Reserve, BEA, BLS, TrendMacro calculations 8

9 ABCPMMLF $0 Other credit $0 MMIFF $0 Repos $0 PDCF $0 TAF $0 CPFF $0 AIG $0 Discount window $0 Maiden Lane III $0 Maiden Lane II $0 TALF $0 MaidenLane $2 SDR certificates $5 Swap lines $0 Gold $11 TSLF $25 Other assets $30 Treasury currency $49 Agencies $7 Misc $168 AIG accrual $0 SFP $0 Term deposits $14 Other deposits $83 Misc $5 Treasury $185 Other liab, cap $48 MBS $1,788 Reverse repos foreign $236 Reverse repos other $112 Required reserves $182 Currency $1,584 Excess reserves $2,060 Treasuries $2,440 The Fed's assets, and how they are funded (USD billions) Assets do not perfectly match liabilities because we include unsettled MBS purchases and sales $5,000 $4,500 Assets Year ago $4,539 Total $4,526 Year ago Liabilities $4,500 Total $4,508 $4,000 $3,500 $3,000 Fed 17% $2,500 Ownership of US federal debt Other 83% $2,000 $1,500 $1,000 $500 $0 Source: Federal Reserve H.4, US Treasury, TrendMacro calculations 9

10 The Fed s asset purchases, and their effects on markets Stocks and bond yields react to changes in Fed Treasury, agency and MBS holdings $5 $4 Fed assets: Treasuries, agencies and MBS (USD trillions) $3 $2 QE3 M1 money supply QE2 $1 QE1 Currency in circulation $ S&P % 3% 2% US 10-year yield 1% Sector and maturity breakdown of Fed assets, USD trillions --- Monthly cap on un-reinvested maturities $1.77 Banking reserves, USD trillions Treasuries $1.13 $30 bil MBS $20 bil $0.01 $0.04 Treasuries 0-15 days Treasuries days $0.32 Treasuries 91 days to 1 year Treasuries 1-5 years $0.33 $0.63 Treasuries 5 -Treasuries years years plus Source: Federal Reserve, Bloomberg, TrendMacro calculations $0.01 Agencies MBS Excess $2.06 Required $

11 Money supply growth, YOY quarterly M1 M2 Monetary base 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% Source: Federal Reserve H.6, TrendMacro calculations Monetary velocity, quarterly M1 base multiplier ---- M1 output multiplier M2 base multiplier ---- M2 output multiplier 12x 10x 8x 6x 4x 2x 0x Source: BEA, Federal Reserve H.6, TrendMacro calculations 11