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Economic Research
Published by Raymond James & Associates
Scott J. Brown, Ph.D., (727) 567-2603, [email protected]
August 22 - 26, 2016
Weekly Economic Monitor _______________________________________________________________________________________
Rethinking Monetary Policy Frameworks
In late August, central bankers from around the world come
to the Kansas City Fed’s annual monetary policy symposium.
This year’s theme is “Designing Resilient Monetary Policy
Frameworks for the Future.” In addressing the financial crisis
and ensuing recovery, the Fed and other central banks have
pulled out all the stops. This will be a chance to look back at the
various elements (communications strategies, large-scale asset
purchases, negative policy rates, etc.) with an eye to the future
and how central banks can better prepare for future crises.
At the July 26-27 Federal Open Market Committee, Fed
officials were briefed by the staff on progress made in
evaluating “potential long-run frameworks for monetary policy
implementation.” This was a process that began a year earlier.
Given the wide range of tools used by central banks in recent
years, it’s worthwhile to evaluate their effectiveness and their
drawbacks. No firm conclusions were reached in late July, and
nothing is expected to be settled in Jackson Hole this week. The
FOMC minutes noted that any decision regarding an appropriate
long-run implementation framework “would not be necessary
for some time,” but the discussion has begun.
An economic downturn can be addressed through monetary
policy or fiscal policy. Monetary policy is largely about changing
short-term interest rates (the reserve requirement is not much
of an option for the Fed), but we’ve seen other tools being used
over the last decade, including large-scale asset purchases (what
most people call “quantitative easing” or QE), special funding
programs, and new communications strategies (forward
guidance on rates). Fiscal policy refers to tax policy and to
changes in government consumption and investment.
The broad consensus among economists is that monetary
policy is quick to implement but affects the economy with a long
and variable lag. Fiscal policy, on the other hand, has a more
immediate impact but is notoriously hard to implement
(requiring an act of Congress). Most economists believe that
you cannot fine-tune the economy with either fiscal or
monetary policy. Both can be employed to help the economy
out of recession, but monetary policy should do the “heavy
lifting.” Monetary policy is often viewed as ineffective in the
initial response to a downturn. Lower interest rates won’t
stimulate capital spending if firms aren’t confident that demand
for the goods and services they produce will recover, nor will
low rates encourage consumer borrowing if individuals are
worried about losing their jobs. Currently, the view that the Fed
and other central banks are merely “pushing on a string” still
seems to be a widespread concern. However, while monetary
policy efforts do not guarantee a recovery, they do help to limit
the damage during an economic downturn.
Many of the Fed’s district bank presidents are worried about
potential inflation in wages. Average hourly earnings rose 2.6%
in the 12 months ending in July, but these officials worry that
the job market has already tightened enough and, with
monetary policy affecting the economy with a lag, it would be
appropriate to move closer to neutral sooner rather than later.
In mid-June, 6 of the 12 district banks had requested that the
Fed’s Board of Governors increase the discount rate – and that
was after a disappointing payroll report for May!
The FOMC minutes showed that several Fed officials worried
that an extended period of low interest rates risked intensifying
investors to reach for yield and could lead to the misallocation
of capital and mispricing of risk, with possible adverse
consequences for financial stability down the line. As the Fed
employed extraordinary measures to support the economy in
recent years, it has consistently monitored the fixed income
market for signs of excess. It’s likely that tighter credit spreads
were one reason for the initial increase in short-term interest
rates last December. Recall that credit spreads widened
significantly in early 2016, but that was not entirely unwelcome
in the Fed’s view. It largely reflected a re-pricing (or more
correctly, a “right-pricing”) of credit. While Fed officials have
not spoken much about this risk, it is almost certainly a factor in
the Fed’s desire to resume policy normalization.
Other Fed officials are worried that inflation will continue to
undershoot the Fed’s 2% target. While prices of raw materials
may have begun to firm up more recently, there’s no
appreciable evidence of inflation in consumer goods (in fact, exfood and energy, the CPI for consumer goods is registering mild
deflation). Pressure in services has largely been concentrated in
shelter and medical care. These Fed officials are also aware of
the asymmetry of policy errors. That is, it would be much
harder for the Fed to correct course if it raises rates too rapidly
than if it raises rates too slowly. There’s little cost to waiting.
Above all these issues and concerns, Fed officials are also
coming around to the idea that potential economic growth has
slowed. The more moderate growth outlook is largely due to
the slowing in labor force growth (a 1.8% annual rate from
1960-2000, +0.6% since 2000, and about 0.5% seen over the
next ten years). Productivity growth has notably slowed over
the last five years, but most Fed officials expect that to pick up.
Regardless, the neutral Federal funds rate is lower now.
Quarter after quarter, Fed officials have repeatedly revised
lower their projected paths of the federal funds target rate.
Their estimates of the long-term equilibrium rate have also
declined. Expect these projections to edge lower again at the
September FOMC meeting. Also, don’t expect any easy answers
from Fed Chair Yellen’s speech at the end of the week.
© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. (RJA) as of the date stated above and are subject to change. Information has been obtained from third-party
sources we consider reliable, but we do not guarantee that the facts cited in the foregoing report are accurate or complete. Other departments of RJA may have information that is not available to the Research Department about
companies mentioned in this report. RJA or its affiliates may execute transactions in the securities mentioned in this report that may not be consistent with the report's conclusions.
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International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
Raymond James
Economic Research
Treasury Yields
13-wk 26-wk 52-wk
7/22/16
8/12/16
8/19/16
0.33
0.29
0.44
0.43
0.55
0.56
Dollar
2-yr
3-yr
5-yr
10-yr
30-yr
$/Euro
0.71
0.71
0.84
0.82
1.13
1.10
1.57
1.51
2.29
2.23
1.097
1.117
Recent Economic Data and Outlook
Financial market participants were a bit cautious ahead of the Fed
policy meeting minutes, fearful that officials would be anxious to
raise short-term interest rates. However, while we didn’t learn
much from the minutes, they were viewed largely as “dovish.”
Industrial Production: Manufacturing (2012 = 100)
105
104
105
104
Manufacturing
Ex-autos
103
103
102
102
101
101
100
100
99
99
Source: Federal Reserve
98
98
12
13
14
15
16
The FOMC Minutes from the July 26-27 monetary policy
meeting showed that members “generally agreed that, before
taking another step in removing monetary accommodation, it
was prudent to accumulate more data in order to gauge the
underlying momentum in the labor market and economic
activity.” In the discussion, which included seven non-voting
Fed district bank presidents, officials were mixed. “Many” felt
that it was appropriate to wait for more information before
raising rates. “Several’ suggested that there would be ample
time to react if inflation rose more than anticipated. However,
“some” officials thought that there has already been enough
improvement in the job market. A “few” feared that the Fed
would need to raise rates more rapidly if inflation picked up,
and “several” worried that low interest rates would lead to a
reach for yield “and could lead to the misallocation of capital
and mispricing of risk, with possible adverse consequences for
financial stability.”
Industrial Production rose 0.7% in July (-0.5% y/y), boosted by
hot weather and a possible quirk in the seasonal adjustment for
autos. The output of utilities rose 2.1%, following a similar gain
in June (+3.5% y/y). Mining rose 0.7% (-10.2%), with oil and gas
well drilling (down 76% since late 2014) up 4.9% (suggesting a
possible bottom in energy exploration). Manufacturing output
rose 0.6% (+0.4% y/y), led by a 1.9% rise in motor vehicle
production (down 20.5% before seasonal adjustment, reflecting
more limited seasonal factory shutdowns, +1.8% y/y). Ex-autos,
factory output rose 0.4% (flat year-over-year), with mixed
results across major industries.
$/BP
Equities
JY/$
1.309 106.22
1.293 101.01
CD/$
NASD
SPX
DJIA
1.318 5100.16 2175.03 18570.85
1.294 5232.90 2184.05 18576.47
The Consumer Price Index was unchanged in July (-0.041%
before rounding, +0.8% y/y), reflecting a 1.6% decline in energy
prices (-10.9% y/y). Food was unchanged (+0.2%), split between
a 0.2% decline in food at home (-1.6% y/y) and a 0.2% increase
in food away from home (+2.8% y/y). Gasoline prices fell 4.7%
(-5.5% before seasonal adjustment, -19.9% y/y). Ex-food &
energy, the CPI rose 0.1% (+0.088% before rounding, +2.2% y/y).
Shelter rose 0.2% (+3.3% y/y), held back by a 2.7% decline in
lodging away from home (-1.5% before adjustment, unchanged
y/y). Ex-food, energy, and shelter, the CPI was flat (+1.4% y/y).
Real Hourly Earnings were unchanged in July, +1.7% y/y (+2.0%
y/y for production workers).
Building Permits edged down 0.1% in July to a 1.152 million
seasonally adjusted annual rate (+0.9% y/y). Single-family
permits fell 3.7% (+2.4% y/y), down in all four regions.
Unadjusted permits for May-July were down 9.1% relative to the
same period in 2015 (single-family +2.9%, multi-family -25.2%).
Housing Starts rose 2.1% to a 1.211 million pace (+5.6% y/y),
with single-family starts up 0.5% (+1.3% y/y).
Homebuilder Sentiment rose to 60 in August, vs. 58 in July
(revised from 59). Results were mixed across regions.
The Index of Leading Economic Indicators rose 0.4% in July,
following a 0.3% rise in June. An increase in the factory
workweek, a higher stock market, and a positively-sloped yield
curve made the largest positive contributions. A decrease in
consumer expectations made the only subtraction.
Economic Outlook (3Q16): about a 3.0% annual rate.
Employment: Monthly payroll figures have been uneven. The
underlying trend in private-sector payrolls remains relatively
strong but slower than in the last couple of years.
Consumers: Spending was strong in the first half of the year, but
real income growth appears to have slowed. That may be
temporary. Aggregate wage income improved in July.
Manufacturing: Mixed across sectors in recent months but
relatively soft overall, reflecting the contraction in energy
exploration and the strong dollar’s impact on exports. Lean
inventories suggest some potential for a pickup in production.
Housing/Construction: Single-family construction has been
trending higher, but multi-family activity has moderated
following a very strong pace in 2015. Mortgage rates remain
low, but home prices are rising (contributing to affordability
issues). Credit for first-time buyers is still relatively tight.
Prices: Core inflation appeared to be picking up in the first two
months of the year, but March-June data show a moderate
trend. Pipeline pressures are mild. Wage gains are moderate.
Interest Rates: The Fed remains in tightening mode but is
expected to proceed cautiously as it normalizes policy. Most
Fed officials expect one or two 25-bp hikes by the end of 2016.
© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
2
Raymond James
Economic Research
This Week:
forecast
last
Jul
580
-2.0
592
+3.5
Jul
5.55
-0.4
5.57
+1.1
8/20
Jul
265
+2.9%
+0.2%
-0.0%
262
-3.9%
-0.4%
+0.4%
2Q16
+1.2%
+2.8%
+0.8%
+1.1%
90.6
90.0
Jul
+0.6%
+0.4%
+0.1%
+0.2%
+0.4%
+0.1%
+0.2% led by a pickup in wage income
+0.4% auto sales higher, gasoline prices down
+0.1% core CPI rose 0.088%
Consumer Confidence
ADP Payroll Estimate, th.
Chicago PM Index
Pending Home Sales Index
Aug
Aug
Aug
Jul
97.8
+160
56.2
+0.6%
97.3
+179
55.8
+0.2%
97.4
+176
56.8
-3.7%
range-bound
likely to trend somewhat lower
moderate
a bit choppy, but a moderate trend
Jobless Claims, th.
Construction Spending
ISM Manf. Index
Motor Vehicle Sales, mln
domestically built
8:30 Nonfarm Payrolls, th.
private-sector
Unemployment Rate
employment/population
Avg. Weekly Hours
Avg. Hourly Earnings
8:30 Trade Balance, $bln
goods only
10:00 Factory Orders
8/27
Jul
Aug
Aug
265
NF
53.4
NF
NF
+150
+165
4.8%
59.8%
34.5
+0.2%
-42.5
-64.0
NF
265
-0.6%
52.6
17.8
13.8
+255
+217
4.9%
59.7%
34.5
+0.3%
-44.5
-66.0
-1.8%
266
-0.1%
53.2
16.7
12.8
+292
+259
4.9%
59.6%
34.4
+0.1%
-41.0
-62.2
-1.6%
trending low
an unexpectedly soft trend in 2Q16
mixed, but likely moderate
likely to pull back following strong July
underlying trend should be flattening
government likely to pull back somewhat
likely to post a more moderate increase
mostly steady
edging higher
seen steady
moderate wage pressures
seen narrower
reflecting lower petroleum prices
a soft trend
Monday
8/22
no significant data
Tuesday
8/23
Wednesday
8/24
10:00 New Home Sales, th.
% change
1:00 Treasury Note Auction
10:00 Existing Home Sales, mln
% change
11:30 Treasury FRN Auction
1:00 Treasury Note Auction
Thursday
8/25
Friday
8/26
8:30 Jobless Claims, th.
8:30 Durable Goods Orders
ex-transportation
nondef cap gds ex-aircraft
1:00 Treasury Note Auction
nd
8:30 Real GDP (2 estimate)
Priv Dom Final Purchases
8:30 Adv. Economic Indicators
10:00 UM Consumer Sentiment
10:00 Janet Yellen speaks
last –1 comments
John Lee Hooker (b. 1917)
Jul
Aug
572 these data are erratic
0.0 but the underlying trend is strong
$26 billion in 2-year notes
5.51 likely to be little changed
+1.5 trend is strong
$13 billion in re-opened 2-year FRNs
$34 billion in 5-year notes
266
-2.9%
-0.5%
-0.6%
trending low
expecting a rebound in aircraft orders
a weak trend
seen about flat
$28 billion in 7-year note
+0.9% +1.2% in the advance estimate
+1.8% +2.7% in the advance estimate
July foreign trade in goods, inventories
93.5 90.4 at mid-month
“Federal Reserve's Monetary Policy Toolkit”
Next Week:
Monday
8/29
8:30 Personal Income
Personal Spending
PCE Price Index ex-f&e
Tuesday
Wednesday
8/30
8/31
10:00
8:15
9:45
10:00
Thursday
9/01
8:30
10:00
10:00
tbd
Friday
9/02
Aug
Jul
Jul
This Week…
Financial market participants may react to any surprises in the
economic data reports, but there’s nothing that will add much
to the overall economic outlook. Instead, the focus will be on
Janet Yellen’s Jackson Hole speech. The Fed chair is unlikely to
provide any clear signals about what policymakers will do at the
September 20-21 policy meeting. Instead, expect a general
discussion of monetary policy frameworks – the importance of
flexibility and clear communications, the strengths and
weaknesses of large-scale asset purchases, and issues
surrounding negative policy rates (not that the Fed expects to
go there anytime soon). The Fed and central banks have done a
lot of things during and after the financial crisis, and it’s worth
sorting all that out to better plan for the next major crisis.
Monday
No significant data.
Tuesday
New Home Sales, th.
1400
1400
1200
1200
1000
1000
800
800
New Home Sales
For Sale
600
600
400
400
200
200
Source: Bureau of Census
0
0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
3
Raymond James
Economic Research
New Home Sales (July) – The government’s home sales figures
are reported with such a huge degree of statistical uncertainty,
it’s a wonder that they even publish them. The data are choppy
and subject to large revision, but the underlying trend is higher.
Contributions To U.S. GDP Growth, %
6
6
Pers. Spd.
Resid. Inv.
Exports
Ch. Invent.
5
4
Bus. Inv.
Gov't
Imports
Real GDP
5
4
Wednesday
3
3
Existing Home Sales (July) – In contrast to new home sales
2
2
1
1
0
0
-1
-1
-2
-2
figures, which have yet to rebound to pre-bubble levels, existing
home sales have been relatively strong in recent months.
However, there is still plenty of variability (partly reflecting the
difficulty of adjusting for the strong seasonal pattern).
Existing Home Sales and Pending Home Sales Index, th.
130
6500
-3
Pending Home Sales Index (left)
6000
Existing Home Sales (right)
120
-3
Source: BEA
-4
-4
14.1
14.2
14.3
14.4
15.1
15.2
15.3
15.4
16.1
16.2
16.3
16.4
5500
Advance Economic indicators (July) – Inventory and foreign trade
110
5000
100
4500
4000
90
3500
80
3000
Source: National Association of Realtors
70
2500
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Thursday
Jobless Claims (week ending August 20) – Initial claims for
unemployment benefits have been below 300,000 for the last
76 weeks, the longest string since 1970.
Durable Goods Orders (July) – Monthly changes in orders tend to
be choppy. The underlying trend over the last several quarters
has been soft but not “recessionary.” We should see a rebound
in aircraft orders leading the headline figure higher in July.
Durable Goods Orders, y/y % change
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-15
nondef. capital goods, ex-aircraft
durable goods, ex-transportation
-20
figures for July will help to refine forecasts of 3Q15 GDP growth,
but financial market participants will likely pay no attention.
Yellen Jackson Hole Speech – Over the years, the Fed Chairman’s
Jackson Hole speech has often been market-moving but just as
often not. The theme of this year’s monetary policy symposium
is “Designing Resilient Monetary Policy Frameworks for the
Future.” We know that Fed officials are split, but the hawkish
view (those wanting to raise rates sooner rather than later) is a
small minority of the Federal Open Market Committee members
(those that actually vote on policy). Most likely, Yellen will want
the FOMC to keep its options open for September.
Next Week …
Another month, another payroll report. The strong gains of
June and July made almost everyone forget the poor May figure.
However, they may simply reflect noise in the data – the trend
in job growth, while still moderately strong, has slowed
somewhat relative to the last couple of years. That may reflect
greater business caution, or tighter job market conditions, or a
combination. Expect a quick market reaction to the jobs data as
market participants look to a three-day weekend (and the start
of the college football season).
Coming Events and Data Releases
September 5
Labor Day Holiday (markets closed)
-10
September 6
ISM Non-Manufacturing Index (August)
-15
September 15
Retail Sales (August)
-20
September 21
FOMC Policy Decision, revised Fed projections,
Yellen press conference
-25
-25
-30
-30
September 26
1 Presidential Debate (Hempstead, NY)
-35
October 9
2 Presidential Debate (St. Louis, MO)
October 19
3 Presidential Debate (Las Vegas, NV)
November 2
FOMC Policy Decision (no press conference)
November 8
Election Day
December 14
FOMC Policy Decision, Yellen press conference
Source: Census Bureau
-35
05
06
07
08
09
10
11
12
13
14
15
16
Friday
Real GDP (2Q16, 2nd estimate) – The 2
nd
estimate can differ a lot
from the advance figure. However, component revisions appear
to have about balanced out on average (inventories likely did
not fall as much as in the initial estimate, while net exports are
expected to subtract). Data will be revised again next month.
st
nd
rd
© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
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