A Registered Investment Advisory Firm What Can We Expect for 2017 from the FOMC? Dr. Robert Eisenbeis Vice Chairman & Chief Monetary Economist bob.eisenbeis@cumber.com. Further distribution prohibited without prior permission.
The December 2016 FOMC Meeting This slide deck is intended to detail how the FOMC saw the economy at its most recent meeting, its assessment of progress towards achieving its dual mandate of maximum employment consistent with price stability, and what if any policy decision it may have made. It reviews the current aggregate data available to the Committee on GDP growth, employment and prices. This is followed with summary information on the evolution of the Committee s forecasts and the rate assumptions made by Committee participants that underlay their forecasts. The presentation concludes with some observations on the likely path for the federal funds rate As the result of the December meeting, a dissection of the information that will be available to the Committee at subsequent meetings in 2017, and an assessment of the views of the voting members of the Committee, we suggest that there will be at most two rate moves in 2017 not the three widely discussed in the financial press. Of course, the actual decisions will be based upon incoming data.. Further distribution prohibited without prior permission. 2
FOMC December Statement What did the FOMC say in December? Labor market has strengthened Economic activity has expanded at a moderate pace Household spending increasing at a moderate pace Investment spending remained soft Inflation increased since earlier this year, still below its 2% target, partly due to energy prices and non-energy imports What data is the FOMC looking at? GDP Employment Inflation. Further distribution prohibited without prior permission. 3
Q3 GDP Is Now at 3.2% on High End of Moderate After reasonable numbers in 2014, the economy has been in a funk Source: Haver Analytics Source: Haver Analytics Three consecutive quarters of growth at less than 1.4% before Q3 2016 1960-1970 GDP Growth: 4.4% 1983-2006 GDP Growth: 3.5%. Further distribution prohibited without prior permission. 4
Contributions to Growth Source: Haver Analytics Consumer spending was actually Down y/y and more in line with Spending in 2015 than Q2 2016. Further distribution prohibited without prior permission. 5
Corporate Profits Lag GDP and Imply Modest Growth Source: Haver Analytics. Further distribution prohibited without prior permission. 6
Job Growth Strengthening? Economy created an average of 229K jobs per month in 2015 v 181 per month in 2016 Source: Haver Analytics. Further distribution prohibited without prior permission. 7
We Are Too Complacent on Jobs If the economy created the same number of jobs per dollar of real GDP that it did From 1960 to 1970, we should have had 4 times the 459k we had in 2Q2016 From 1983 to 2006 we should have had 2 times the number of jobs we had in 2Q2016 In short, the economy is not producing jobs at the rate it should and by historical standards we are way behind. Further distribution prohibited without prior permission. 8
PCE is Far From 2% Target But Narrowing Gap has narrowed from 1.82 in Oct 2015 to.6 in Oct 2016 Source: Haver Analytics. Further distribution prohibited without prior permission. 9
What/When Will the Fed Know? FOMC Mtg Dates GDP Employment Inflation 29-Nov Q3 2016 2 nd est. (3.2%) Nov 30 for Oct (161K) Nov 4 for Oct (1.4%) 2016 December 13-14 2017 Jan 31-Feb 1 2017 Mar 14-15 2017 May 2-3 22-Dec Q3 2016 final Dec 22 for Nov Dec 22 for Nov 27-Jan Q4 1 st est. Jan 30 for Dec Jan 6 2017 for Dec 2016 28-Feb Q4 2016 2 nd est. Mar 1 for Jan Feb 3 for Jan 2017 Mar 3 for Feb 30-Mar Q4 final Mar 31 for Feb Apr 7 for Mar 28-Apr Q1 2017 1 st est May 1 for Mar 26-May Q1 2017 2nd est. May 30 for Apr May 5 for Apr June 2 for May Source: Haver Analytics 2017 June 13-14 29-Jun Q1 2017 final June 30 for May July 7 for June 2017 July 25-26 28-Jul Q2 2017 1st est. Aug 1 for June Aug 5 for July As of December, the FOMC will only have a revised Q3 2016 GDP number and two more reading on employment and inflation.. Further distribution prohibited without prior permission. 10
GDP, Unemployment, Inflation Source: Federal Reserve. Further distribution prohibited without prior permission. 11
Unemployment Source: Federal Reserve. Further distribution prohibited without prior permission. 12
PCE Inflation Source: Federal Reserve. Further distribution prohibited without prior permission. 13
PCE Inflation Core Source: Federal Reserve. Further distribution prohibited without prior permission. 14
Source: Federal Reserve. Further distribution prohibited without prior permission. 15
Projected Federal Funds At Yearend Source: Federal Reserve. Further distribution prohibited without prior permission. 16
Who Are the Dots? It matters who the voters on the FOMC and not the median or range Six FOMC members see only one or two rate moves in 2017 Who might they be? Bullard is one of the low dots, we know At least 4 of the 5 Fed Board members are among the low dots Maybe Fischer is not President Dudley is one of the low dots It takes now 6 votes to determine policy. With 5 board members and 5 Fed Presidents voting on the FOMC, only one president and 5 governors can determine policy Board Members Bank Presidents Voting in 2017 Yellen Brainard Fischer Powell Tarullo Dudley (FOMC Vice Chair) Evans (likely favoring low rates) Harker Kaplan Kashkari. Further distribution prohibited without prior permission.
FRB Director Discount Rate Forecast Kaplan Evans Dudley Kashkari Source: Federal Reserve. Further distribution prohibited without prior permission. 18
Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.. Further distribution prohibited without prior permission. 19