Economic Update: Fed Takes on Growth Chris Low June 6, 2018 Chief - - PowerPoint PPT Presentation
0 Economic Update: Fed Takes on Growth Chris Low June 6, 2018 Chief Economist On the one hand Rising yields reflect changing Fed goals Fear of deflation & zero lower bound dominated Bernanke/Yellen Fed Powell says will respect
Chris Low Chief Economist June 6, 2018
Fear of deflation & zero lower bound dominated Bernanke/Yellen Fed
Powell says will respect PhDs on the committee
Old-school Phillips curve thinking reemerging
On the one hand…
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0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Bloomberg
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0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 Williams-Laubach r* estimate
Source: San Francisco Fed. Williams-Laubach two-sided estimates
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0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 2003 2005 2007 2009 2011 2013 2015 2017
10-yr TIPS yield
Reflects supply of/demand for credit
Old Normal
Source: Bloomberg
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0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00% 2003 2005 2007 2009 2011 2013 2015 2017 Old Normal
Source: Bloomberg
Average inflation expected over next 10 years
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1.00% 1.50% 2.00% 2.50% 3.00% Dec '17 Now
58 52 56 58 65 67 57 52 49 30
0bp 25bp 50bp 75bp 100bp 1M 1Y 2Y 3Y 5Y 7Y 10Y 30Y
Source: Bloomberg
Stronger economy can handle higher rates
Confidence points to increased spending
Higher rates could limit the consumption bounce
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0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Q1-14 Q1-15 Q1-16 Q1-17 Q1-18 Q1-19
Consumption Res Investment
Inventories Net exports Government Real GDP, Yr/Yr% Final Sales, Yr/Yr%
Source: Bureau of Economic Analysis and FTN Financial
Problematic for Fed as unemployment falls below 4.0%
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0% 10% 20% 30%
0.0 25.0 50.0 75.0 100.0 125.0 150.0 2004 2006 2008 2010 2012 2014 2016 2018 CEO Survey: Capex Sub-Index (left) Business equipment investment, y/y%, right BRT CEO Survey: Capex Sub-Index & Private Fixed Invest IP Equipment
Source: CEO Roundtable
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5 10 15 20 25 30 35 40 1980 1985 1990 1995 2000 2005 2010 2015
Small-business optimism: Good time to expand
Source: NFIB
34% is highest ever.
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46.0 48.0 50.0 52.0 54.0 56.0 58.0 60.0 62.0 2012 2013 2014 2015 2016 2017 2018
ISM manufacturing index ISM nonmanufacturing index
Source: Institute for Supply Management
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Source: Bureau of Labor Statistics and FTN Financial
0k 50k 100k 150k 200k 250k 300k 350k 400k Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18
Nonfarm Payrolls Change, 000s Government Pvt svce producing Goods producing Payrolls 12-mo average
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3.5% 4.5% 5.5% 6.5% 7.5% 8.5% 9.5% 10.5% 1990 1995 2000 2005 2010 2015
3.7% 3.9% 4.1% 4.3% 4.5% 4.7% 4.9% Jan-17 Jul-17 Jan-18
Source: Bureau of Labor Statistics and FTN Financial
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1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 1988 1993 1998 2003 2008 2013 2018
Production & nonsupervisory Year-on-Year %
Source: Bureau of Labor Statistics
“To get wages to go up sustainably in the long term we need higher productivity.” - Jay Powell, March 1, 2018
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0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 1990 1995 2000 2005 2010 2015
Recessions Productivity, yr/yr%
Source: Bureau of Labor Statistics
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1.6% 1.5% 2.5% 0.8% 1.6% 1.5%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 1995-99 2013-17
Nominal GDP 5.7% Real GDP 4.1% Nominal GDP 3.7% Real GDP 2.2% Employment growth Productivity growth Inflation (GDP Deflator)
Source: Bureau of Labor Statistics and Bureau of Economic Analysis
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1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Median wage growth U6 underemployment rate
Original Phillips Curve From 1998, U6 lagged 3 quarters
Latest data
Source: Atlanta Fed, Bureau of Labor Statistics and National Bank of Canada
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1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Median wage growth U6 underemployment rate
Original Phillips Curve From 1998, U6 lagged 3 quarters
Latest data
Source: Atlanta Fed, Bureau of Labor Statistics and National Bank of Canada
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0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
Core PCE Inflation U6 underemployment rate
New-Keynesian Phillips Curve
From 1998, U6 lagged 3 quarters
Latest data
Source: Atlanta Fed and Bureau of Labor Statistics
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1% 2% 3% 4% 5% 2018 2019 2020 Longer-Term
Note: Each blue dot represent the expectations of one FOMC member. The median target range for 2018 is 2.125, for 2019, it is 2.875%, for 2020 3.375%, and for the Longer-Term is is 2.875%.
Target federal funds rate at year-end (Mar '18)
Central tendency
Source: Federal Reserve and FTN Financial
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0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Fed funds futures 6/14/18 Tightening implied by FOMC forecasts - June 2018
FOMC dot-plot year- end medians.
Longer-run FOMC median
Source: Federal Reserve, Bloomberg, and FTN Financial
Emerging market unrest
Higher oil prices
Stock market
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Source: IMF
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$50 $55 $60 $65 $70 $75 $80 $85 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18
Price per barrel, active contract
Source: Bloomberg
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150 200 250 300 350 400 May-17 Sep-17 Jan-18 May-18
125.88% (143.62% ann.)
Source: Bloomberg and FTN Financial
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15% 20% 25% 30% 35% 40% 45% 0.035 0.040 0.045 0.050 0.055 0.060 0.065 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18
US dollars per peso central bank 7D repo rate (left)
Source: Bloomberg
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2500 2550 2600 2650 2700 2750 2800 2850 2900 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18
Source: Bloomberg
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3.5% growth; cools next year Wage growth rising, inflation low Fed controls expansion’s length Productivity necessary to sustain expansion 1-2 more rate hikes this year Bonds rally as long as Fed is disciplined Watch for tighter credit in subprime, leveraged
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