Trend Macrolytics, LLC Donald Luskin, Chief Investment Officer Thomas Demas, Managing Director Michael Warren, Energy Strategist Data Insights: Federal Reserve Wednesday, December 19, 2018 Today's FOMC statement: how the language changed from prior meeting November 08December 19, 2018 Federal Reserve issues FOMC statement Information received since the Federal Open Market Committee met in SeptemberNovember indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declinedremained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators 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. The Committee expectsjudges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. RisksThe Committee judges that risks to the economic outlook appearare roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook. In view of realized and expected labor market conditions and inflation, the Committee decided to maintainraise the target range for the federal funds rate at 2 to 2-1/4 to 2-1/2 percent. 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 maximum employment objective and its symmetric 2 percent inflation objective. 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. Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles. Source: FOMC, TrendMacro analysis Copyright 2018 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.
"Considerable period" "Patient" "Measured" "Some time" "Extended period" "To mid-2013" "To late 2014" "To mid-2015" "Till UE 6.5%" "Well past 6.5%" Yellen Rule 38 words 43 words Considerable period Patient Further improvement Some further improvement Fedspeak regime change: the evolution of forward guidance 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% Funds rate target Core PCE inflation UE Rate "New thing", 5.5 41730 0% 2002 2003 2004 2005 2006 2007 Source: FOMC, Federal Reserve, BLS, BEA, TrendMacro calculations 44 words: "Further" Furhter gradual Other voices: number and direction of FOMC decision dissents 2012 2013 2014 2015 2016 2017 2018 Source: FOMC, TrendMacro calculations 2
2.32% 2.29% 2.30% 2.32% 2.31% 1.90% 1.70% 1.70% 2.06% 2.01% 1.96% 2.35% 2.33% 3.54% 3.65% 3.53% 3.89% 3.94% 4.06% 3.94% 3.70% 3.29% 3.37% 4.06% The dual mandate: garbage in, garbage out Unemployment rate Trend from peak Core PCE inflation YOY Trend from trough 11% 10% 9% 8% 7% 1.78% Inflation trend 1.64% 1.5% 6% 5% "Full employment" range 4.1% to 4.7% 1.0% 3.74% 4% 2007 2009 2011 2013 2015 2017 2019 2021 Source: BLS Current Population Survey, TrendMacro calculations 0.5% So many policy rules, so little time As of November 28, 2018 Based on inputs from: FOMC Summary of Economic Projections Congressional Budget Office Cleveland Fed Actual (midpoint), 2.38% Source: Cleveland Fed, TrendMacro calculations 3
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 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Estimating the natural rate of interest Actual funds rate Neutral real funds rate (Laubach-Williams + YOY Core PCE) Recession +20% +18% +16% +14% +12% +10% +8% +6% +4% +2% 0 Funds rate Actual: 2.38% Neutral 2.60% Source: New York Fed, Federal Reserve, BEA, TrendMacro calculations R-star the ultimate "dotplot" As of Sep 18 FOMC participants' estimate of longer run target fed funds rate Vote by individual participant Weighted average 4.5% 4.0% 3.5% 3.0% Source: Federal Reserve, TrendMacro calculations 4
Sep 18 Dec 18 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18 Tracking the "dotplots" year by year As of Sep 18 FOMC participants' estimate of "appropriate" target fed funds rate Vote by participant Average For year-end 2019 4.5% 4.0% 3.5% 2.65% 3.0% 2.80% 2.89% 2.85% 2.75% 2.70% 2.92% 2.96% 3.02% 2.85% 1.5% 1.0% 0.5% 0.0% For year-end 2020 5.0% 4.5% 4.0% 3.5% 3.0% 1.5% 1.0% 0.5% 0.0% 2.85% 3.02% 3.33% 3.31% 3.28% 3.07% For year-end 2021 4.5% 4.0% 3.5% Average, 3.01% 3.0% Average, 3.23% 1.5% 5
Forecast versus actual: economic projections of the FRB and presidents As of Sep 18 Forecast Actual 2009 10 11 12 13 14 15 16 17 18 19 20 2021 Unemployment 11% 10% 9% 8% 7% 6% 5% 4% 3% 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 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 As of September 2018. Updated three weeks after June FOMC in Data Insights: FOMC Minutes 65 65 Sep 18 60 Mar 2018 Mar 2017 60 55 55 Dec 2016 50 Dec 2017 50 45 Sep 2017 June 2018 45 40 Sep 2016 Jun 2017 Core PCE 40 PCE 35 30 40 50 60 70 <-- Less risk to forecast More risk to forecast --> 35 30 40 50 60 70 <-- Less risk to forecast More risk to forecast --> 65 65 60 60 55 50 UE 55 50 45 45 40 40 GDP 35 30 40 50 60 70 <-- Less risk to forecast More risk to forecast --> 35 30 40 50 60 70 <-- Less risk to forecast More risk to forecast --> Source: Federal Reserve Board, TrendMacro calculations 7
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 $0 SDR certificates $5 Swap lines $0 Gold $11 TSLF $21 Other assets $25 Treasury currency $50 Agencies $2 Misc $148 AIG accrual $0 SFP $0 Term deposits $0 Other deposits $70 Misc $5 Treasury $323 Other liab, cap $45 MBS $1,654 Reverse repos foreign $235 Reverse repos other $0 Required reserves $200 Currency $1,706 Treasuries $2,219 Excess reserves $1,552 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 $4,519 Year ago Liabilities $4,500 Total $4,136 Total $4,136 $4,000 $3,500 $3,000 Fed 11% $2,500 Ownership of US federal debt Other 89% $2,000 $1,500 $1,000 $500 $0 Source: Federal Reserve H.4, US Treasury, TrendMacro calculations 8
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 $383.6 bils from peak Fed assets: Treasuries, agencies and MBS (USD trillions) $4 $3 $2 QE3 M1 money supply Normalization QE2 $1 QE1 Currency in circulation $0 3000 2500 2000 S&P 500 1500 1000 500 4% 3% 2% US 10-year yield 1% Sector and maturity breakdown of Fed assets, USD trillions --- Monthly cap on un-reinvested maturities, max effective after 10/31/18 $1.65 Banking reserves, USD trillions $0.00 Treasuries $30 bil $0.96 MBS $20 bil $0.09 $0.30 $0.26 $0.62 $0.00 Excess $1.55 Required $0.20 Treasuries 0-15 days Treasuries 16-90 days Treasuries 91 days to 1 year Treasuries 1-5 years Treasuries 5 -Treasuries 10 10 years years plus Agencies MBS Source: Federal Reserve, Bloomberg, TrendMacro calculations 9
Money supply growth, YOY quarterly M1 M2 Monetary base 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 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 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Source: BEA, Federal Reserve H.6, TrendMacro calculations 10