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Ramirez & Co., Inc.
61 Broadway, 29th Floor
New York, NY 10006
(800) 888-4086
July 2017
The Macroeconomic Outlook
Table of Contents:
1. The Quarterly Macroeconomic Outlook
Appendix. Thoughts on Ultra-Long Treasury Bonds
Page 3
The Macroeconomic Roadway
Tailwinds Neutral Headwinds
Political Risk Anti-trade rhetoric may cause an anti-American retaliation in countries such as Mexico and China
The political mood is sour. A populist rebellion, nurtured by years of sluggish growth and disruptions of old business models, is still spreading globally.
Even though more than 80% of job losses in the US are due to technology and only about 15% due to international trade, globalization is out of favor
Economic Growth
(US)
(International)
US GDP growth expectations move up slightly to around 2% plus versus a historical average of ~3%. Aging demographics, slowing population growth,
slowing workforce growth and productivity declines will put downward pressures on GDP growth
Questions remain whether structural reforms (tax, infrastructure, spending, healthcare) proposed by the new administration will push GDP growth back
to its historical average
In the US, Eurozone, Asia, and the emerging markets, for the first time since a brief rebound in 2010, all the cylinders are firing at once. The IMF
increases its global growth forecast to 3.5%
Labor Markets
(US)
(International)
The U3 unemployment dips towards the lower-bound of its estimated natural rate, while the U6 rate is inching towards its pre-crisis levels. Yet, where
there is labor slack, it is highly correlated with lower levels of educational attainment
Average hourly earnings increase by 2.5% YoY and aggregate hours worked increase by a solid 1.7% YoY, pointing to gains in private consumption
Fears about Chinese overcapacity and of Yuan devaluation recede. The European commission’s economic sentiment index hits its highest level, and
Eurozone unemployment its lowest level, since 2011
Inflation The FOMC still expects that inflation will rise to its long-run level of 2%, once oil and import prices stop falling. US services inflation fluctuates around 3% as goods inflation hovers in negative territory
While market-based measures of inflation (5Y out 5Y inflation swap) trend down, survey- based inflation expectations (U. of Mich.) hover around 2.5%
Global overcapacity, primarily due to China, and technology-enabled disruption will be the main focus that will push inflation downwards
Monetary Policy
(Fed)
(International)
The Fed estimates that the equilibrium real rate, r*, is near zero in the short-term and 1% in long-term
As the unemployment and inflation gaps disappear, the Fed affirms its Fed Funds rate projections of one more 25 bps hike in 2017 and to 3% in the
long-term, while announcing that the tapering of its balance sheet will commence as soon as late 2017
Recent trends of international capital flows into the US—lifting the dollar and lowering US bond yields—may be reversing at the end of the quarter
Fiscal Policy Business and household surveys begin to reflect expectations of pro-growth fiscal and economic reforms. Hard data will lag these expectations as the passing and end-effects of new legislation will take time
Government debt and unfunded entitlements will pose a problem, particularly as interest rates start going up
Fed estimates suggest that the US is underinvested in infrastructure by about $3-4 trillion
The Markets
As 10-year rates increase by about 60 bps through 2016YE, equally divided between increases in inflation expectations and the real rate, they remain at approximately 2016YE levels. Equity markets show optimism
While broad-based stress indicators fall since the beginning of the year, the VIX and the bond market MOVE index still hover around historically low levels, despite episodic spikes possibly reflecting fears about the Trump administration
Page 4
Source: Wall Street Research, Bloomberg, Calculations by Ramirez.
US Government Rates Outlook, 3Q17 – 2Q18
Surveyed Projections, 3Q 2017 Surveyed Projections, 4Q 2017
Surveyed Projections, 1Q 2018 Surveyed Projections, 2Q 2018 All (medians)
3Q17 (%) 4Q17 (%) 1Q18 (%) 2Q18 (%)
FF 1.00-1.25 1.25-1.50 1.25-1.75 1.50-2.00
2Y 1.55 1.75 1.83 1.98
10Y 2.40 2.50 2.60 2.70
30Y 2.95 3.05 3.20 3.20
Historical Rates
3/31/2017 (%) 6/30/2017 (%) 7/7/2017 (%)
FF 0.75-1.00 1.00-1.25 1.00-1.25
2Y 1.25 1.38 1.40
10Y 2.39 2.30 2.39
30Y 3.01 2.83 2.93
Each of the major banks remain confident that there will be another rate hike in 2017 (three total), while the
markets place the chance of at least one more hike at just below 60% (measured by option implied probability)
Expected increases on the short end of the yield curve have not been equally reflected in the long end, i.e. further
flattening is still expected
Pessimistic and base case projections about the economy expect the year-end 10Y rate to increase up to 15 bps
from the current rate (three banks). Optimistic projections about the economy see an increase in the year-end 10Y
rate up to 25-35 bps (two banks).
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FF2Y 10Y 30Y
Inte
rest R
ate
(%
)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FF2Y 10Y 30Y
Inte
rest R
ate
(%
)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FF2Y 10Y 30Y
Inte
rest R
ate
(%
)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
FF2Y 10Y 30Y
Inte
rest R
ate
(%
)
Page 5
(1) Spread-Based Source: Wall Street Research
Asset Allocation Survey as of 1Q 2017
GDP forecasts point to the 2.0% - 2.2% range
Inflation forecasts jump to 2.4% - 2.9%
US and European fixed income is UW
Plurality of forecasts are OW in US TIPs, US credit and USD
Fixed Income Credit (1) Equities Forex Commodities Alternatives US Macro
(Left axis)
Yo
Y (
%)
Reco
mm
en
de
d
Weig
ht
-4
-3
-2
-1
0
1
2
3
4
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Neutral Overweight Underweight Flatten
Page 6
Source: Bloomberg
US GDP and its Components, 2Q 2016 – 1Q 2017
The US Economy, 2Q 2016 – 1Q 2017
Quarterly fluctuations not withstanding, economic
activity continues to expand at a moderate pace
(~2.0%)
Consumption and real personal disposable
income grow significantly faster than the GDP
growth rate (~3%)
Investment increases at about the same rate as
GDP (~2.1%), with business fixed investment
appearing to have rebounded significantly (~3.2%)
Government expenditures decline significantly
(~ -1.6%)
Exports grow by 3.6%, while imports increase by
3.9%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Ma
r-1
7
De
c-1
6
Se
p-1
6
Jun
-16
Ma
r-1
6
De
c-1
5
Se
p-1
5
Jun
-15
Ma
r-1
5
De
c-1
4
Se
p-1
4
Jun
-14
Ma
r-1
4
De
c-1
3
Se
p-1
3
Jun
-13
Ma
r-1
3
De
c-1
2
Se
p-1
2
Jun
-12
Ma
r-1
2
De
c-1
1
Se
p-1
1
Jun
-11
Ma
r-1
1
De
c-1
0
Se
p-1
0
Jun
-10
Ma
r-1
0
De
c-0
9
Se
p-0
9
Jun
-09
Ma
r-0
9
De
c-0
8
Se
p-0
8
Jun
-08
Ma
r-0
8
De
c-0
7
Se
p-0
7
Jun
-07
Ma
r-0
7
De
c-0
6
Se
p-0
6
Co
ntr
ibu
tio
n t
o %
C
ha
ng
e in
GP
D
Consumption InvestmentNet Exports Government Expenditures
06/30/16 09/30/16 12/31/16 03/31/17
Real GDP (QoQ, SAAR) 1.4% 3.5% 2.1% 1.4%
Personal consumption 4.3 3.0 3.5 1.1
Goods 7.1 3.5 6.0 0.5
Durables 9.8 11.6 11.4 (1.6)
Nondurables 5.7 (0.5) 3.3 1.6
Services 3.0 2.7 2.4 1.4
Gross private domestic investment (7.9) 3.0 9.4 3.7
Fixed investment (1.1) 0.1 2.9 11.0
Nonresidential 1.0 1.4 0.9 10.4
Structures (2.1) 12.0 (1.9) 22.6
Equipment (2.9) (4.5) 1.9 7.8
Intellectual Property Products 9.0 3.2 1.3 6.4
Residential (7.7) (4.1) 9.6 13.0
Government expenditures & gross investment (1.7) 0.8 0.2 (0.9)
Federal spending (0.4) 2.4 (1.2) (2.0)
State and local spending (2.5) (0.2) 1.0 (0.2)
Net exports of goods & services
Exports 1.8 10.0 (4.5) 7.0
Imports 0.2 2.2 9.0 4.0
Addenda
Final sales of domestic product (a)
2.6 3.0 1.1 2.6
Gross domestic income (GDI) (b)
0.7 5.0 (1.4) 1.0
Gross national product (GNP) (c)
2.2 3.4 2.9 1.1
Disposable personal income 2.90 2.90 (0.30) 1.70
Contributions to % Change in GDP
Personal Consumption 2.88 2.03 2.40 0.75
Gross Private Domestic Investment (1.34) 0.50 1.47 0.60
Change in Private Inventories (1.16) 0.49 1.01 (1.11)
Government Consumption and Investments (0.30) 0.14 0.03 (0.16)
Net Exports of Goods and Services 0.18 0.85 (1.82) 0.23(a) GDP less change in private inventories (b) GDI-GDP = statistical discrepency (c) GDP plus net
foreign payments for US factors of production
Page 7
* Graphic from https://www.frbatlanta.org/cqer/research/gdpnow.aspx as of 7/10/2018. Note: GDPNow forecasts pertain to the most recent quarter with no reported GDP number; once an advance number is reported for a particular quarter, GDPNow switches to predicting the subsequent quarter. All GDP numbers are quarter-on-quarter percent change in real GDP, seasonally adjusted and annualized. Source: Bloomberg, Atlanta Federal Reserve Bank
Nowcasting GDP: The Atlanta Fed’s GDPNow
Reported Real GDP Growth vs GDPNow Forecast, 4Q14 – 2Q17 GDPNow Forecast vs Consensus for 2Q 2017*
Following the report of the advance number for GDP growth in April, the GDPNow forecast for
2Q17 has steadily declined from about 4% to nearly 2.7%
The GDPNow forecast falls roughly in line with Blue Chip consensus forecasts and below
Bloomberg median consensus of 3%
1Q17
4Q16
3Q16
2Q16 1Q16
4Q15
3Q15
2Q15
1Q15
4Q14
-1
0
1
2
3
4
5
Dec-1
4
Ma
r-1
5
Jun
-15
Se
p-1
5
Dec-1
5
Ma
r-1
6
Jun
-16
Se
p-1
6
Dec-1
6
Ma
r-1
7
Jun
-17
Pe
rce
nt
Ch
an
ge
, Q
oQ
GDPnow Forecast Advance Revision Final
2Q17
Pe
rce
nt
Ch
an
ge
, Q
oQ
https://www.frbatlanta.org/cqer/research/gdpnow.aspxhttps://www.frbatlanta.org/cqer/research/gdpnow.aspx
Page 8
Notation: Est. = Establishment Survey by BLS, HH = Household Survey by BLS, DoL = US Department of Labor, BLS = Bureau of Labor Statistics. ** YoY, 1Q17, according to US Census Bureau’s quarterly services survey Source: Bloomberg
US Macroeconomic Indicators , March 2017 – June 2017
US consumer spending continues to
expand at annualized rate of ~3.6%
Both U3 and U6 unemployment rates
approach approximate pre-crisis levels,
while slack remains among less educated
workers
US industrial production grows at an
annualized rate of 0.8%, while non-
manufacturing activities increase by a
nominal 6.3%**
Different measures of inflation including
CPI (1.9%, YoY), core CPI (1.7%, YoY),
core PCE (1.4%, YoY) remain somewhat
below the Fed’s 2% target, yet:
Services inflation reaches 2.6%,
while
Goods inflation trends downwards
to -0.8%
3/31/2017 4/30/2017 5/31/2017 6/30/2017⁽¹⁾ LTM Max LTM Min
State of the Consumer
US Consumer Spending (SA, MoM%) 0.4 0.4 0.1 -- 0.7 0.1
US Auto Sales (SAAR, mil.) 16.5 16.8 16.6 16.4 18.3 16.4
New One Family Houses Sold (SAAR, 000's) 644.0 593.0 610.0 -- 644.0 548.0
Existing Homes Sold (SAAR, mil.) 5.7 5.6 5.6 -- 5.7 5.3
Housing Starts (SAAR , 000's) 1,189.0 1,156.0 1,092.0 -- 1,328.0 1,062.0
Housing Permits (SAAR, 000's) 1,260.0 1,228.0 1,168.0 -- 1,300.0 1,168.0
U. of Mich. Consumer Confidence 96.9 97.0 97.1 95.1 98.5 87.2
Conference Board Consumer Confidence 124.9 119.4 117.6 118.9 124.9 96.7
US Pending Home Sales Index (SA, 2001=100) 111.3 109.4 108.5 -- 112.3 106.4
US Personal Income(SA, MoM%) 0.2 0.3 0.4 -- 0.6 (0.1)
US Retail Sales (SA, MoM%) 0.1 0.4 (0.3) -- 1.0 (0.3)
Labor Market*
Unemployment (SA, %), HH 4.5 4.4 4.3 4.4 4.9 4.3
Unemployed and Part Time (SA, %), HH 8.9 8.6 8.4 8.6 9.7 8.4
Change in Non-Farm Payroll (SA, 000's), Est. 50.0 207.0 152.0 222.0 291.0 50.0
Unemployed Workers Total (SA, 000's), HH 7,202.0 7,056.0 6,861.0 6,977.0 7,904.0 6,861.0
Labor Participation Rate (SA, %), HH 63.0 62.9 62.7 62.8 63.0 62.6
Civilian Labor Force Level (SA, 000's), HH 160,201.0 160,213.0 159,784.0 160,145.0 160,213.0 159,295.0
US Civilian Noninstitutional Population Total (SA, 000's), HH 254,414.0 254,588.0 254,767.0 254,957.0 254,957.0 253,620.0
Employed in Civilian Labor Force, Net Change (SA, 000's), HH 472.0 156.0 (233.0) 245.0 472.0 (233.0)
ADP National Employment Report (SA , 000's) 255.0 148.1 230.2 158.0 268.4 61.7
US Initial Jobless Claims (SA, 000's, weekly )⁽³⁾, DoL 235.0 238.0 255.0 248.0 266.0 227.0
US Average Hourly Earnings (SA, YoY%), Est. 2.6 2.5 2.4 2.5 2.9 2.4
Employment Cost Index (SA, QoQ%, quarterly ), BLS 0.8 -- -- -- 0.8 0.5
US Avg. Weekly Hr. Worked, Nonfarm Private, Nonsupervisory (SA), Est. 33.6 33.7 33.6 33.7 33.7 33.6
Production
US Industrial Production MoM (SA, %) 0.1 1.1 0.0 -- 1.1 (0.3)
US Services Revenue Total YoY (NSA, %, quarterly ), Census 6.3 -- -- -- 6.3 5.2
US Durable Goods New Orders MoM (SA, %) 2.4 (0.8) (0.8) -- 6.1 (4.6)
US Durable Goods New Orders Ex Transportation MoM (SA, %) 0.9 (0.4) 0.3 -- 1.7 (0.4)
ISM Manufacturing PMI (SA, %) 57.2 54.8 54.9 57.8 57.8 49.4
ISM Non-Manufacturing PMI (%) 55.2 57.5 56.9 57.4 57.6 51.7
Philadelphia Fed Business Outlook Survey (SA, %) 32.8 22.0 38.8 27.6 43.3 (0.9)
Empire State Manufacturing Survey (SA, %) 16.4 5.2 (1.0) 19.8 19.8 (5.5)
Chicago Purchasing Manager Index (SA, %) 57.7 58.3 59.4 65.7 65.7 50.3
Prices
CPI (YoY%) 2.4 2.2 1.9 -- 2.7 0.8
Core CPI (YoY%) 2.0 1.9 1.7 -- 2.3 1.7
CPI Consumer Services ex. Energy (YoY%) 2.9 2.7 2.6 -- 3.2 2.6
CPI Consumer Commodities ex. Food/Energy (YoY%) (0.6) (0.6) (0.8) -- (0.2) (0.8)
PCE Core (SA, MoM%) (0.1) 0.1 0.1 -- 0.3 (0.1)
PCE Core (SA, YoY%) 1.6 1.5 1.4 -- 1.8 1.4
U. of Mich. Expected Change in Prices During the Next Year: Median (%) 2.5 2.5 2.6 2.6 2.7 2.2
U. of Mich. Expected Change in Prices During the Next 5-10 Years (%) 2.4 2.4 2.4 2.5 2.6 2.3
US Personal Consumption Expenditures Chain Type (SA, MoM%) (0.2) 0.2 (0.1) -- 0.4 (0.2)
US Personal Consumption Expenditures Chain Type (SA, YoY %) 1.8 1.7 1.4 -- 2.1 0.9
PPI Final Demand (SA, MoM%) (0.1) 0.5 0.0 -- 0.6 (0.2)
Case-Shiller Composite-20 City (YoY%) 5.9 5.7 -- -- 5.9 5.0
TIPs Break Even 5Y (daily )⁽⁴⁾ 2.0 1.8 1.8 1.7 2.0 1.3
⁽¹⁾ most recent number for the period 5/31/17 - 7/7/17, ⁽²⁾ preliminary number, ⁽³⁾ For past months numbers are end-of-period; for current month, all available numbers are
listed ⁽⁴⁾ For past months numbers are end-of-period; for current month, most recent number available
Page 9
Notes: Each index reflects, at a moment in time, the surprise of various economic indicators, measured in standard deviation. They are further modified by adjusting for importance of the indicators and the recency of the latest report of those indicators. Citi’s index is reported in basis points. Source: Bloomberg
Economic Surprises
Citi Economic Surprise Indicators, Jun 2016 – Jun 2017 Bloomberg Economic Surprise Indicators, Jun 2016 – Jun 2017
-100
-80
-60
-40
-20
0
20
40
60
80
100
Jun
-16
Jul-
16
Au
g-1
6
Se
p-1
6
Oct-
16
Nov-1
6
Dec-1
6
Jan
-17
Fe
b-1
7
Ma
r-1
7
Ap
r-17
Ma
y-1
7
Le
ve
l
US (Citi) Eurozone (Citi) Emerging Markets (Citi)
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
Jun
-16
Jul-
16
Au
g-1
6
Se
p-1
6
Oct-
16
Nov-1
6
Dec-1
6
Jan
-17
Fe
b-1
7
Ma
r-1
7
Ap
r-17
Ma
y-1
7
Le
ve
l
US (Bloomberg) Eurozone (Bloomberg)
In the US, economics indicators are recently reporting below expectations
In Europe and Emerging Markets, indicators surprise to the upside
On a monthly basis, economic surprise indicators have a statistically significant, positive
influence on treasury rates, but only explain about 15% of the variance
Page 10
Note: All GDP data are reported quarterly. Inflation-adjusted numbers are based on headline CPI. Source: U.S. Bureau of Economic Analysis, U.S.
Bureau of Labor Statistics, Bloomberg
Statistical Properties of US GDP and the Real Interest Rate
Real GDP Growth, Q2 1953 – Q1 2017 30 Year Real Interest Rates, Feb 1977 – May 2017
Composition of US GDP, Q1 1981 – Q1 2017
In equilibrium, real interest rates
converge towards real GDP
Over the years, US consumption has
crept up from about 60% of GDP to
70%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
14.0
%
12.5
%
11.0
%
9.5
%
8.0
%
6.5
%
5.0
%
3.5
%
2.0
%
0.5
%
-1.0
%
-2.5
%
-4.0
%
-5.5
%
-7.0
%
-8.5
%
Fre
qu
en
cy
March 2017: 1.40% Mean: 3.05%
Median: 3.05%
Standard Deviation: 3.63%
Kurtosis: 1.40%
Skewness: -0.20%
Std Error of Mean: 0.23%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
16.0
%
14.5
%
13.0
%
11.5
%
10.0
%
8.5
%
7.0
%
5.5
%
4.0
%
2.5
%
1.0
%
-0.5
%
-2.0
%
-3.5
%
-5.0
%
-6.5
%
-8.0
%
-9.5
%
Fre
qu
en
cy
May 2017: 4.15% Mean: 3.13%
Median: 3.16%
Standard Deviation: 3.77%
Kurtosis: 2.55%
Skewness: 0.18%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Consumption/GDP Investment/GDP
Government Expenditures/GDP Net Exports/GDP
Page 11
The Fed’s Reaction Function and the Taylor Rule, May 1972 – May 2017
Source: Bloomberg.
The Fed’s Reaction Function: The Taylor Rule
The Taylor reaction function is widely used to explain Fed Funds target rates
Target Rate = Real Rate (r*)
+ Core Inflation
+ ½ • (Inflation-Target Inflation)
+ ½ • Okun Factor • (Normal Unemployment – Unemployment)
+ f(Global Market Conditions)
+ f(Financial Stress)
The Fed seems to incorporate global market conditions and financial stress in its decision making
Though the natural real rate is not directly observable, many economists believe that it is presently near zero
James Bullard of the St. Louis Fed believes that the natural real rate will remain near zero in the long run, as reflected in
his “Fed dot”
-10
-5
0
5
10
15
20
25
-10
-5
0
5
10
15
20
25
Rate
s/S
pre
ad
(%
)
Recession Spread: Fed Funds - Taylor Estimate Fed Funds Rate Target Taylor Rule Estimate
Page 12
Note: The Laubach-Williams estimation of the natural real rate is determined via the Kalman filter and is hence not directly observable. For each point in time for the one-sided estimate, only data from prior to that moment is used; for the two-sided estimate, both future and prior information is incorporated.
* The Economist Estimate Source: The Economist, Bloomberg
Real Interest Rates
Estimations of the Natural Real Rate, Mar 1971 – Mar 2017 World Real Interest Rate, 1985 – 2016
Persistently low US and Global real interest rates generate heated debates, and continue to puzzle
-2
0
2
4
6
8
10
12
14
16
18
20
22
Ma
r-7
1
Ma
r-7
3
Ma
r-7
5
Ma
r-7
7
Ma
r-7
9
Ma
r-8
1
Ma
r-8
3
Ma
r-8
5
Ma
r-8
7
Ma
r-8
9
Ma
r-9
1
Ma
r-9
3
Ma
r-9
5
Ma
r-9
7
Ma
r-9
9
Ma
r-0
1
Ma
r-0
3
Ma
r-0
5
Ma
r-0
7
Ma
r-0
9
Ma
r-1
1
Ma
r-1
3
Ma
r-1
5
Ma
r-1
7
Rate
(%
)
Natural Real Rate (Laubach-Williams est., 1-sided)
Natural Real Rate (Laubach-Williams est., 2-sided)
Target Fed Funds Rate
Page 13
Overlay of Fed Funds Forecasts
Fed Dots From Python Fed Dots From Python
FOMC Outlook, Meeting by Meeting, Jun 2016 – Mar 2017 Outlook on Pace of Policy Firming as of Mar 2017
Source: Federal Reserve; Bloomberg
The Fed Funds Rate
Option-Implied Probability of Target by FOMC Meeting as of 7/7/2017 Various Fed Funds Forecasts as of Jun 2017
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2017 2018 2019 Longer run
Targ
et
Fe
dera
l F
un
ds R
ate
(%
)
9/21/2016
12/14/2016
3/15/2017
6/14/2017
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2017 2018 2019 Longer Run
Targ
et
Fe
dera
l F
un
ds R
ate
(%
)
June 14, 2017
March 15, 2017
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Exp
ecte
d F
ed
Fu
nd
s R
ate
(%
)
Futures-Implied (as of Jun 16) Futures-Implied (as of Mar 31)
Fed Forecast Primary Dealers (as of Apr 24)
Market expectations
remain below the Fed’s
Target Fed Funds Rate (%)
0.75
-1
1-1.25
1.25
-1.5
1.5-
1.75
1.75
-2
2-2.25
2.25
-2.5
2.5-
2.75
FO
MC
Meeti
ng
Date
7/26/2017 0 100 0 0 0 0 0 0
9/20/2017 0 78 22 0 0 0 0 0
11/1/2017 0 77 23 0 0 0 0 0
12/13/2017 0 42 48 10 0 0 0 0
1/31/2018 0 41 47 11 0 0 0 0
3/21/2018 0 25 45 25 4 0 0 0
5/2/2018 0 25 45 25 5 0 0 0
6/13/2018 0 18 40 31 10 1 0 0
8/1/2018 0 18 39 31 11 2 0 0
9/26/2018 0 13 34 33 16 4 1 0
11/8/2018 0 13 32 33 17 5 1 0
12/19/2018 0 9 26 33 22 9 2 0
1/30/2019 0 9 26 33 22 9 2 0
Probability of Target Rate (%) at Meeting
FO
MC
Meeti
ng
Date
Page 14
US Wage Growth
Historical US Inflation & Wages
Historical US Inflation & Wages
Source: Federal Reserve; Bloomberg
Inflation Indicators
US Wages & Inflation Indicators, May 2014 – May 2017
Inflation measured by core PCE runs consistently below the Fed’s 2% target
Goods inflation dips below zero, while services inflation fluctuates around 3%
US Goods & Services, May 1988 – May 2017
US Wage Growth, Jun 2006 – Jun 2017 Headline CPI, Apr 1953 – May 2017
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Yo
Y %
Ch
an
ge
US Recessions
US CPI Urban Consumers Services Less Energy Services
US CPI Urban Consumers Commodities Less Food & Energy SA YoY%
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Yo
Y %
Ch
an
ge
US Avg. Hourly Earnings Empl Cost IndexPCE Defl. PCE ex Food/EnergyCPI Services ex. Energy CPI Commodities ex. Food/Energy
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
Mo
M, %
Ch
an
ge
US Avg. Hourly Earnings, Nonsup. Private Nonfarm Payrolls (Nom. Dollars, SA)
12-month Geom. MA
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
16.0
%
15.0
%
14.0
%
13.0
%
12.0
%
11.0
%
10.0
%
9.0
%
8.0
%
7.0
%
6.0
%
5.0
%
4.0
%
3.0
%
2.0
%
1.0
%
0.0
%
-1.0
%
-2.0
%
-3.0
%
-4.0
%
-5.0
%
-6.0
%
-7.0
%
-8.0
%
Fre
qu
en
cy
May 2017: -1.19% Mean: 3.57%
Median: 2.43%
Standard Deviation: 3.91%
Kurtosis: 3.79%
Skewness: 0.64%
Page 15
Source: The Federal Reserve Bank of New York. US Treasury. Bloomberg.
Maturity Profile of US Treasury Securities & Fed Holdings
SOMA Holding of Treasuries as Percent of Outstanding Treasuries
0
5
10
15
20
25
30
35
40
45
50
Less than3 years
3-6 Years 6-10 Years 10-30Years
TIPS FRNsFe
d H
old
ing
s a
s %
of
En
tire
M
ark
et
2014 2015 2016
US Treasury: Marketable Securities Outstanding
0
2
4
6
8
10
12
14
16
Ma
r-9
7
Ma
r-9
8
Ma
r-9
9
Ma
r-0
0
Ma
r-0
1
Ma
r-0
2
Ma
r-0
3
Ma
r-0
4
Ma
r-0
5
Ma
r-0
6
Ma
r-0
7
Ma
r-0
8
Ma
r-0
9
Ma
r-1
0
Ma
r-1
1
Ma
r-1
2
Ma
r-1
3
Ma
r-1
4
Ma
r-1
5
Ma
r-1
6
Ma
r-1
7
Am
ou
nt
Ou
tsta
nd
ing
($
, T
rill
ion
s)
Bonds Notes Bills FRN TIPS
US Treasury: Current Maturity Profile of Marketable Securities
0
500
1000
1500
2000
2500
3000
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
Am
ou
nt
Ou
tsta
nd
ing
($,
bil
lio
ns
)
Calendar Year
Bill Note Bond TIPS FRN
The Fed’s SOMA Portfolio: The Drawdown
0
10
20
30
40
50
60
70
80
Oct-
17
Jan
-18
Ap
r-18
Jul-
18
Oct-
18
Jan
-19
Ap
r-19
Jul-
19
Oct-
19
Jan
-20
Ap
r-20
Jul-
20
Oct-
20
Jan
-21
Am
ou
nt
($, b
illi
on
s)
Treasuries Maturing in Month Proposed Reinvestment Cap
Amount to be retired
Amount to be reinvested
Page 16
Source: Bloomberg, Federal Reserve, ECB
Balance Sheet of the Fed & ECB
Federal Reserve Assets, Jun 2006 – Jun 2017 Federal Reserve Liabilities, Jun 2006 – Jun 2017
ECB Assets, Jun 2006 – Jun 2017 ECB Liabilities, Jun 2006 – Jun 2017
Contraction Path
Start Increment Final
UST $6bln / Mo. $6bln / 3Mo. $30bln / Mo.
MBS $4bln / Mo. $4bln / 3Mo. $20bln / Mo.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Ju
n-0
6
Ju
n-0
7
Ju
n-0
8
Ju
n-0
9
Ju
n-1
0
Ju
n-1
1
Ju
n-1
2
Ju
n-1
3
Ju
n-1
4
Ju
n-1
5
Ju
n-1
6
Ju
n-1
7
Assets
(€ b
illio
ns)
Gold and Gold Receivables Other Assets
Securities of Euro Area Residents Lending to Euro Area Credit Institutions
0
1,000
2,000
3,000
4,000
5,000
Ju
n-0
6
Ju
n-0
7
Ju
n-0
8
Ju
n-0
9
Ju
n-1
0
Ju
n-1
1
Ju
n-1
2
Ju
n-1
3
Ju
n-1
4
Ju
n-1
5
Ju
n-1
6
Ju
n-1
7
Assets
($ B
illio
ns)
Mortgage-Backed Securities Held Outright US Treasury Securities Held Outright
Other Assets Commercial Paper Funding Facility
Term Auction Faciliity Loans (Incl. Term Asset-Backed Securities Loan Facility)
Federal Agency Debt Securities Held Outright
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Ju
n-0
6
Ju
n-0
7
Ju
n-0
8
Ju
n-0
9
Ju
n-1
0
Ju
n-1
1
Ju
n-1
2
Ju
n-1
3
Ju
n-1
4
Ju
n-1
5
Ju
n-1
6
Ju
n-1
7
Lia
bili
ties (
€ B
illio
ns)
Liabilities to Euro Area Credit Institutions Other Liabilities
Liabilities to other residents in Euro Liabilities to other residents in foreign currency
Currency In Circulation
0
1,000
2,000
3,000
4,000
5,000
Ju
n-0
6
Ju
n-0
7
Ju
n-0
8
Ju
n-0
9
Ju
n-1
0
Ju
n-1
1
Ju
n-1
2
Ju
n-1
3
Ju
n-1
4
Ju
n-1
5
Ju
n-1
6
Ju
n-1
7
Lia
bili
ties (
$ B
illio
ns)
Reserve Balances with Federal Reserve Banks Other Factors Absorbing Reserve Funds
Currency In Circulation
Page 17
Note: Interbank rates are provided by Bloomberg and are often provided without indication of which bank listed the quote. In top charts, Fed (resp. ECB) ratio is defined at the size of the Fed’s (ECB’s) assets divided by the US (Eurozone) GDP; “Fed/ECB” is the ratio of these two ratios. “$M2” and “€M2” are defined similarly but central bank assets are replaced with M2 money supply. Source: Bloomberg, Federal Reserve, ECB
Balance Sheet of the Fed & ECB (cont’d)
Central Bank Assets, Fed vs ECB, Jun 2001 – Jun 2017 Money Supplies, Fed vs ECB, Jun 2001 – Jun 2017
Interbank Lending Rates by Country, Jun 2007 – Jun 2017 Benchmark Policy Rates by Country, Jun 2008 – Jun 2017
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
US
D/E
uro
Ex
ch
an
ge
Rate
Cen
tral B
an
k A
ss
ets
to
GD
P
Fed ratio ECB ratio Fed/ECB USD / Euro
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2.00
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
US
D/E
uro
Ex
ch
an
ge
Rate
Mo
ne
y S
up
ply
to
GD
P
$M2 ratio €M2 ratio $M2/€M2 USD / Euro
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Ju
n-0
7S
ep
-07
De
c-0
7M
ar-
08
Ju
n-0
8S
ep
-08
De
c-0
8M
ar-
09
Ju
n-0
9S
ep
-09
De
c-0
9M
ar-
10
Ju
n-1
0S
ep
-10
De
c-1
0M
ar-
11
Ju
n-1
1S
ep
-11
De
c-1
1M
ar-
12
Ju
n-1
2S
ep
-12
De
c-1
2M
ar-
13
Ju
n-1
3S
ep
-13
De
c-1
3M
ar-
14
Ju
n-1
4S
ep
-14
De
c-1
4M
ar-
15
Ju
n-1
5S
ep
-15
De
c-1
5M
ar-
16
Ju
n-1
6S
ep
-16
De
c-1
6M
ar-
17
Ju
n-1
7
Ra
te (
%)
United States ECB SwizerlandDenmark Japan Sweden
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Ju
n-0
7S
ep
-07
De
c-0
7M
ar-
08
Ju
n-0
8S
ep
-08
De
c-0
8M
ar-
09
Ju
n-0
9S
ep
-09
De
c-0
9M
ar-
10
Ju
n-1
0S
ep
-10
De
c-1
0M
ar-
11
Ju
n-1
1S
ep
-11
De
c-1
1M
ar-
12
Ju
n-1
2S
ep
-12
De
c-1
2M
ar-
13
Ju
n-1
3S
ep
-13
De
c-1
3M
ar-
14
Ju
n-1
4S
ep
-14
De
c-1
4M
ar-
15
Ju
n-1
5S
ep
-15
De
c-1
5M
ar-
16
Ju
n-1
6S
ep
-16
De
c-1
6M
ar-
17
Ju
n-1
7
Ra
te (
%)
United States ECB SwitzerlandDenmark Japan Sweden
Page 18
Matt-Employment Data Labor Market Conditions Index
Nonfarm Payrolls vs Moving Average
* Part-time workers (those who worked 1 to 34 hours during the survey reference week and excludes employed persons who were absent from their jobs for the entire week) divided by the civilian labor force. Source: Bloomberg, FRED
Labor Market Conditions
Fed’s Labor Market Conditions Index, May 1988 – May 2017
The BLS measure of US job growth shows strength
in June with payrolls growing by 222K. Unlike the
BLS, ADP’s estimate of private payrolls is less
sensitive to swings and reports a respectable 158K
gain in March.
The 6-month moving average of payroll gains falls
to ~175K from ~250K, an expected result as we
move closer to full employment
Monthly Payroll Gains, Jun 2013 – Jun 2017
Unemployment Rate, Jun 1995 – Jun 2017
-50
-40
-30
-20
-10
0
10
20
30
40
50
Recession Fed Labor Market Conditions Index
50
55
60
65
70
0
5
10
15
20 Pa
rticip
atio
n R
ate
(%)
Em
plo
ym
en
t/U
ne
mp
loym
en
t (%
)
U3 Unemployment RateU6 Unemployment RateEmployment Rate: Part-Time for Economic Reasons, Nonagricultural Industries*US Labor Force Participation Rate (RA)
0
50
100
150
200
250
300
350
400
Net
Ch
an
ge (
Mo
M, 1000s)
Nonfarm Payrolls (MoM, net change, thousands) 6M Moving Average
Page 19
Historical US Financial Conditions Indicators
Historical US Financial Conditions Indicators
Source: Bloomberg
Financial Stress Indicators and GDP
TED Spread (3M LIBOR – 3M UST), Jun 2010 – Jun 2017 US Financial Conditions Indexes, Jun 2007 – Jun 2017
Response of GDP to Goldman Sachs Financial Stress Index, Mar 2005 – Dec 2015
-10
-8
-6
-4
-2
0
2
4
6
8
-10
-8
-6
-4
-2
0
2
4
6
8
Ma
r-05
Jun
-05
Se
p-0
5
Dec-0
5
Ma
r-06
Jun
-06
Se
p-0
6
Dec-0
6
Ma
r-07
Jun
-07
Se
p-0
7
Dec-0
7
Ma
r-08
Jun
-08
Se
p-0
8
Dec-0
8
Ma
r-09
Jun
-09
Se
p-0
9
Dec-0
9
Ma
r-10
Jun
-10
Se
p-1
0
Dec-1
0
Ma
r-11
Jun
-11
Se
p-1
1
Dec-1
1
Ma
r-12
Jun
-12
Se
p-1
2
Dec-1
2
Ma
r-13
Jun
-13
Se
p-1
3
Dec-1
3
Ma
r-14
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-15
Jun
-15
Se
p-1
5
Dec-1
5
% Δ
, Qo
Q %
Δ, Q
oQ
GDP
GDP w/o Financial Shocks
94
96
98
100
102
104
106
-15
-10
-5
0
5
10
15
Le
vel
Bloomberg Financial Conditions Index St Louis Fed Financial Stress Index
GS Financial Conditions Index
0
20
40
60
80
100
120
0
0.2
0.4
0.6
0.8
1
1.2
Sp
read
(bp
s)
Yie
ld (
%)
TED (bps, right) LIBOR 3M (%) UST 3M (%)
Page 20
Political Risk Scores from The Economist, Apr 2005 – Apr 2017
Note: According to The Economist’s methodology, “Political risk evaluates a range of political factors relating to political stability and effectiveness that could affect a country’s ability and/or commitment to service its debt obligations and/or cause turbulence in the foreign exchange market.”
According to the Economic Policy Uncertainty methodology, the uncertainty index is based on newspaper coverage, number of tax-codes set to expire, and disagreement among economists.
Source: The Economist; Bloomberg, "An Index of Global Economic Policy Uncertainty” by Steven J. Davis
at www.PolicyUncertainty.com
Political Risk Around the World
Political risks rise globally, but economic policy uncertainty falls
France dodges a Le Pen presidency and bucks the populist trend by electing Macron
Broad corruption scandals erupt in Brazil, sparing few
Risks in Hong Kong continue to rise as China extends its influence and reneges on the 1984 Sino-British Joint
Declaration
Gauged by economic policy uncertainty, global risks have fallen from recent heights
Global Economic Policy Uncertainty (EPU), Jun 1997 – Jun 2017
0
10
20
30
40
50
60
70
Ap
r-05
Ap
r-06
Ap
r-07
Ap
r-08
Ap
r-09
Ap
r-10
Ap
r-11
Ap
r-12
Ap
r-13
Ap
r-14
Ap
r-15
Ap
r-16
Ap
r-17
Sco
re
France Germany UK ItalyBrazil China Hong Kong USA
0
50
100
150
200
250
300
350
Ind
ex L
evel
United StatesGlobal EPU, Weighted by Current Prices GDPGlobal EPU, Weighted by PPP-Adjusted GDP
Page 21
Source: Bloomberg.
Overseas Economies World GDP Map World Unemployment Map
Selected
Countries
Name Real GDP YoY Unemployment Name Real GDP YoY Unemployment
% Date % Date % Date % Date
North America Europe (cont.)
Canada 3.2 3/17 6.6 5/17 Spain 3.0 3/17 17.8 4/17
US 2.0 3/17 4.3 5/17 United Kingdom 2.0 3/17 4.6 4/17
Mexico 2.8 3/17 3.5 5/17 Asia
Europe China 6.9 3/17 4.0 12/16
France 1.1 3/17 9.5 4/17 Japan 1.3 3/17 2.8 4/17
Germany 1.7 3/17 3.9 4/17 Emerging Markets
Greece 0.4 3/17 22.5 3/17 Brazil -0.3 3/17 13.6 4/17
Italy 1.2 3/17 11.1 4/17 Russia 0.5 3/17 5.2 5/17
Portugal 2.8 3/17 9.8 4/17 Turkey 3.1 6/16 11.5 3/17
Table of Contents:
1. The Quarterly Macroeconomic Outlook
Appendix. Thoughts on Ultra-Long Treasury Bonds
Page 23
* https://www.treasury.gov/press-center/press-releases/Pages/current_TBACMinutesPressRelease.aspx
Main Points
On May 3, 2017, the Treasury Borrowing Advisory Committee released a statement* indicating interest in selling ultra-long bonds:
“…the Committee commented on the demand for ultra-long debt, noting that the regular and predictable issuance policy should
remain the central consideration to minimize Treasury’s funding cost over time”
The statement continued: “…the Committee recommended that Treasury consider issuing a zero coupon 50-year bond, and coupon
maturities between 10- and 30-years, preferably the reintroduction of the 20-year. Finally, the Committee recommended against
issuing a 100-year bond due to limited pension or insurance cash flows beyond 50-years and the preferable attributes of stripped
30-year bonds to meet a similar duration as a 100-year coupon bond.”
We have heeded the Treasury’s call, “The Committee recommended that further work be done to study these demand dynamics to
get a better sense of where an ultra-long bond might price, which could be above or below the longest maturity debt issuance based
on the pricing of domestic ultra-long derivatives, ultra-long bonds abroad, and theoretical models”, and examined the potential cost
benefits to the Treasury enjoyed by issuing a 50-year bond and use a breakeven analysis.
We conclude that if the Treasury had to choose between a 50-year funding realized through one 50-year tranche versus a 50-year
funding realized through a 30-year tranche followed by a subsequent 20-year tranche, then the single 50-year tranche is cheaper to
the Treasury if the 20-year rate rises more than 212 bps from today’s rate over the course of 30 years
We have noted other reports which take into consideration the market’s ability to absorb and sustain this sort of issuance. We offer
no comment on those concerns here. We are strictly concerned with the cheapest options available to the Treasury.
https://www.treasury.gov/press-center/press-releases/Pages/current_TBACMinutesPressRelease.aspxhttps://www.treasury.gov/press-center/press-releases/Pages/current_TBACMinutesPressRelease.aspxhttps://www.treasury.gov/press-center/press-releases/Pages/current_TBACMinutesPressRelease.aspxhttps://www.treasury.gov/press-center/press-releases/Pages/current_TBACMinutesPressRelease.aspxhttps://www.treasury.gov/press-center/press-releases/Pages/current_TBACMinutesPressRelease.aspxhttps://www.treasury.gov/press-center/press-releases/Pages/current_TBACMinutesPressRelease.aspx
Page 24
Source: The Economist, Bloomberg.
Our Chief Economist on Ultra-Long Sovereign Debt
Excerpts from the Economist, May 6th 2017
When introducing a factor for rates, utilities reflect a strong, consistent effect. Also, it appears that the influence of the S&P 500 is heightened (beta = .75)
“…In some countries, such as Britain, interest rates on long-term debt are not much higher—or are even lower—than on shorter-term borrowing. For them, borrowing at ultra-long maturities is likely to be cheaper than medium-term debt, so it makes sense to replace some mid-length bonds with ultra-long ones, says Niso Abuaf of Samuel A. Ramirez & Company, a New York brokerage. This helps to explain why the WAM of British sovereign debt is unusually long, at 14.9 years (see chart).”
Government debt
Taking the ultra-long view
Excerpts from the Bloomberg, May 16th 2017
Bond Math Tells One Analyst Ultra-Long Issuance Would Save Money • Weighing 50-year bond versus a 30-year rolled into a 20-year • Average maturity of U.S. debt remains under six years By Elizabeth Stanton (Bloomberg) -- There are plenty of reasons why the U.S. Treasury may eventually decide against introducing an ultra-long bond. But cost shouldn’t be one of them, according to Niso Abuaf, a Wall Street financial strategist since the mid-1980s. A basic exercise in bond math shows that the government would likely save money by stretching its yield curve to the 50-year mark, said Abuaf, who heads the financial strategy group at Ramirez & Co. in New York. The analysis involves comparing the theoretical cost of issuing a 50-year bond today with the expense of alternatives such as issuing a 30-year bond and then rolling that into a 20-year obligation. The approach requires an interpolated 50-year Treasury yield and the zero-coupon yield curve. It determines the net present value of a 50-year Treasury and the coupon rate for a 20-year bond issued 30 years from now that would…
Page 25
US Treasury Yields as of
6/14/2017
20 Year* 2.45
30 Year 2.77
50 Year (estimated**) 3.17
BE Rate (20 Year) 4.57
Δ to BE (bps) 212
Source: Ramirez & Co. calculations, Bloomberg.
The Numbers: Issuing 50Y vs. 30Y Plus 20Y
If the 20Y rate
increases to
4.57% and
beyond in 30
years, a
current 50Y
funding would
be more cost
efficient
This
represents a
212 bps
increase from
today’s 20Y
level
This analysis
assumes that
the current 20Y
rate is the best
forecast of the
20Y rate 30
years from now
50Y Financing vs. 30Y and Subsequent 20Y: Break-Even Rate
* 20Y rate is the arithmetic average of the 10Y and 30Y rates. ** The 50Y rate is estimated by adding 40 bps to the 30Y rate; this is inspired by the premium on 50Y TVA bond issued in 2015
Firs
t 3
0 y
ears
Fo
llow
ing
20 y
ears
Year Cash Flow
Discount Rates
(Zero-Coupon)
Discounted
Cash Flow
1 $2.77 1.19% $2.74
2 2.77 1.33% 2.70
3 2.77 1.47% 2.65
… … … …
29 2.77 2.91% 1.21
30 4.57 2.95% 1.91
31 4.57 2.98% 1.84
32 4.57 3.01% 1.77
… … … …
49 4.57 3.68% 0.78
50 104.57 3.73% 16.74
$100.00
To compare the advantages (or disadvantages) of a strategy of a 50-year funding of $100 with a single
50-year tranche versus a strategy of a 50-year funding of $100 with a 30-year tranche followed by a 20-
year tranche, we compare the discounted cashflows
By definition, the discounted cashflows of the single 50-year tranche strategy must be $100. The
discounted cashflows of the other strategy will depend on the 20-year rate 30 years from today. If that
20-year rate* rises sufficiently high, then a single 50-year tranche will be less expensive to the Treasury.
Otherwise, a 30-year + 20-year strategy is cheaper
Page 26
Where are Long-Term Rates in The Long Run?
We offer our long-term forecasts of US Treasuries and anchored them on:
the Fed’s median forecast for the Fed Funds rate
long-term tendencies of interest rates with respect to US real GDP growth and inflation
The Fed’s median forecast of the Fed Funds rate centers around 3% for 2019 and beyond. This forecast suggests
a 1% real rate and 2% inflation rate
Theory suggests that the risk free nominal interest rate equals the real rate plus inflation
Theory and empirical evidence suggest that the real rate of interest converges to US real GDP growth
Since the 1950s, US real GDP growth and the real interest rate center around 3%
Currently the base-case forecast for real GDP growth is around 2%, suggesting a 4% base-case forecast for the
10-year UST (2% real + 2% inflation)
Optimistic forecasts of the US economy suggest 3% real growth rate, indicating a 5% long-term 10-year UST rate
(3% real + 2% inflation)
International conditions and excess savings over investment needs may point to downside risks for the
forecasts
Bottom line:
Base-case 10-year UST: 4% in the long term
Optimistic 10-year UST: 5% in the long term
Pessimistic 10-year UST: less than 4% in the long term
Risk: inflation diverging from 2%, international macroeconomic and political risk, US political risk
Academic and Fed forecasters suggest that the most prudent forecasting strategy would be a smooth glide path
from current levels to long-term equilibrium levels
As the Fed suggests, we expect normalization of the Fed Funds rate to be completed by the end of 2019 and
normalization of the 10Y rate to be completed with the paring of the Fed’s balance sheet
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