Fed Note

Fed Note:

The FOMC completed their September meeting, with an outcome of no interest rate policy change as expected, but there was something a little different to announce.  This was a more ‘important’ meeting, being one of the four per year that features a post-meeting press conference and Q&A session, used to clarify and fine-tune policy (which isn’t always crystal clear in the formal releases).

In the released statement, economic activity was described as having risen moderately this year, with solid job gains and low unemployment.  Additionally, household spending shows moderate expansion with business capex having ‘picked up’ in recent quarters.  Despite near-term challenges, the Fed noted that recent hurricanes are unlikely to alter the course of the broader national economy over the medium-term, aside from shorter-term inflation challenges from items such as gasoline.

The new item was the introduction of the balance sheet normalization program.  What is that?  As a backdrop, after the Fed completed the various rounds of quantitative easing years ago, where they had been actively buying treasury and agency mortgage bonds directly to keep yields low in those markets, they continued to reinvest proceeds of maturing bonds in order to keep stimulus from ‘trailing off’ too much, so to speak.  The balance sheet is now $4.5 trillion in size, far larger than historical norms.  To turn the stimulus faucet off completely and start reversing the build-up, it could require the significant selling of bonds held on its balance sheet, which could be disruptive to markets in large amounts by driving down prices and, hence, yields up.  The other option—the one they’ve chosen to use—is letting maturities ‘roll off’ gradually by capping the amount of proceeds they’ll keep reinvesting.

This process is designed to not result in a large degree of market disruption—done by keeping the amounts limited and expectations for this normalization to be done over a long period of time, from $10 billion/month to start, and ramping this up over time.  The assumption, based on statistics from the treasury and outside managers, is about 0.25-0.50% in upward yield drift ultimately.  Today’s announcement was just the first step in a stimulus unwinding process, but it has to happen sometime.  And, with the economy looking stronger, now is as good a time as any.  Importantly, clearing space on the balance sheet could allow the Fed to again provide more stimulus down the road when we are faced with another slowdown, although, hopefully the amounts needed would be far less than during the years of the Great Recession, when stimulus spending was unprecedented.

The ‘dashboard’ of key data reflects few changes from recent meetings:

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Weekly Economic Update

Economic Update 9-18-2017

  • Key economic data for the week included a disappointing retail sales report, slightly weaker consumer sentiment, moderately higher producer and consumer inflation and slightly improved jobless claims.  As anticipated, several of these metrics appear to be affected by recent hurricane activity.
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Weekly Economic Update

Economic Update 9-12-2017

 

  • The short week ended with a temporary respite for the federal budget and debt ceiling debate, strong ISM services results, but higher jobless claims due to hurricane effects.
  • U.S. stocks stumbled a bit on the week, as did foreign stocks in local currency terms, but the latter were saved by a large decline in the U.S. dollar for the week.  Bonds experienced a positive week as yields for certain maturities fell to their lowest levels in some time.  Real estate bucked the trend and fared well, while commodities were generally flat with offsetting forces.

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Weekly Economic Update

Economic Update 9-05-2017

  • Economic news for the late summer week was focused on a revision higher in Q2 GDP results, continued expansionary manufacturing numbers, mixed housing results, and a somewhat disappointing employment report.
  • Equity markets fared positively for the week, with U.S. stocks outperforming both foreign developed and emerging.  Bonds were flattish with credit outperforming, as did emerging market debt.  Commodities saw positive returns with gains in a variety of categories, with the hurricane impact mostly affecting gasoline prices.

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Weekly Economic Update

Economic Update 8-28-2017

  • In a very light late summer week for economic data, housing statistics were generally lackluster, jobless claims remained within recent ranges, while durable goods fell, as expected.
  • Global equity markets gained for the week, upon weak volumes and political rhetoric outweighing any meaningful economic news to move the needle.  U.S. and foreign stocks both saw positive results, with emerging markets leading the way—foreign assets were boosted by a weaker dollar.  Bonds also moved a bit higher, led by high yield.  Commodities were mixed with little change in the prices for energy.

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Weekly Economic Update

Economic Update 8-21-2017

  • Economic data for the week was highlighted by mixed housing results but gains in retail sales, several strong readings from regional manufacturing surveys, and strong results for the index of leading economic indicators and jobless claims.
  • Global equity markets were mixed last week with U.S. stocks losing ground, and foreign stocks gaining slightly on net.  Bonds were little changed along with minimal movement in interest rates, while emerging market bonds fared well.  Commodities lost ground slightly with losses more concentrated in agriculture than in energy.

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Weekly Economic Update

Economic Update 8-15-2017

  • Economic data was highlighted by weakness in inflation, with the PPI and CPI both coming in lower than expected.  On the labor side, the government JOLTs job openings index and claims continued to show strength, while labor cost and productivity growth remained sub-par.
  • Global equity markets fell last week, in line with most risk assets, due to escalating geopolitical tensions with North Korea.  Government bonds, by contrast, in both the U.S. and developed foreign markets fared well that that safe haven-seeking environment, and outperformed corporates and emerging markets.  Commodities lost a bit of ground on net as oil prices fell.

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