Fed holds rates steady but hints at December action

by Jim Baird on September 23, 2016

As widely anticipated, the Fed concluded to stand pat again coming out of today’s meeting.  While this is consistent with expectations, the fact that three voting members dissented suggests a growing divide within the FOMC about the need to act.  In addition, the rate projections released alongside the statement itself points to a clear majority of the committee projecting a rate hike before year-end.  That puts the December meeting in focus as the mostly likely time for the Fed to hike.

Fed policymakers remain stuck in essentially the same position that they have been in for some time.  Using their own characterization, they remain “data dependent”, suggesting that they are evaluating and responding to a range of information about the economy in real time.  The problem is that there is an inherent inconsistency in the data that creates ambiguity and paints a picture of an economy that is, by certain measures, still lukewarm.  A few good months of data is followed by some disappointment.  Job creation may look solid, but wage growth is limited and the economy is still growing at a sub-par pace.

How do you raise rates when inflation is still below the long-run goal, inflation expectations are in check,   and the economy grew at basically 1% in the first half of the year?  Even if you’re optimistic that growth will improve, until that becomes reality, it’s difficult to make the case to tighten, particularly in the absence of an easily identifiable catalyst for stronger growth.  In short, the economy doesn’t appear even close to overheating.

Conversely, the recession ended over seven years ago, and the economy is well into the current growth cycle.  The Fed certainly wants to create some cushion to be able to lower rates when the next recession arrives, but don’t want to act prematurely to choke off growth.

That’s the position that the Fed has been in for some time, and it appears to still be the case today.

Sustainable spending in a low return environment

by Jim Baird on September 22, 2016

Executive Summary

  • ​A 5% spending policy has become the most widely utilized policy among nonprofit organizations and other institutional investors today.
  • While a 5% real return target seemed appropriate and was achievable for most institutions based on historical standards, interest rates and equity market valuations today may make this challenging in the years ahead.
  • Committees should re-evaluate their spending policies within the context of the portfolio’s overall investment policy, and ultimately choose between three available options: increase their risk levels with the hope of achieving a higher return, do nothing and accept potentially lower returns in the future, or find ways to reduce their current spending.
  • Research shows that spending a lower percentage of the portfolio (say 4% rather than 5%) may actually be the best solution for the long-term health and longevity of the organization. However, there is no “right” answer that works for all institutions.

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Jobless Claims (week of 9.17.16) Research Notes

September 22, 2016

Jobless claims decline, remain near four-decade low Initial jobless claims declined to 252,000 for the week ended September 17, down from the previous week’s unrevised print of 260,000. The 4-week average for jobless claims dipped 2,250 to 258,500, extending its downward trend from recent weeks. Generally, claims below 300,000 are viewed as indicative of a […]

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August’s CPI Research Notes

September 16, 2016

Inflation comes in modestly higher than expected for August The Consumer Price index rose in August by 0.2%, stronger than the 0.1% increase expected by economists. The core index increased by 0.3%, also topping expectations for a 0.2% increase. Over the past year, the headline index increased by 1.1%, as falling energy costs in the […]

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August Retail Sales Research Notes

September 15, 2016

Retail sales dip more than expected in August; decline by 0.3% Retail sales declined in August, which was not a surprise; the fact that they dipped as much as they did – by a full 0.3% – was, however. Spending on higher ticket items was hit hard, although there were relatively few retail sectors in […]

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August’s Employment Situation Research Notes

September 2, 2016

Payroll gains fall short of expectations; jobless rate steady at 4.9% for third consecutive month Job market conditions remained solid in August, although the headline payroll gain for the month fell short of expectations. The economy created 151,000 new jobs in August – well below expectations for a gain of 180,000 or more. However, revisions […]

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Consumer Sentiment Research Notes

August 26, 2016

Sentiment slips modestly in August; Q2 GDP revised down to 1.1% Consumer optimism slipped modestly in recent weeks, as the collective assessment of current economic conditions diminished. The University of Michigan Consumer Sentiment Index edged fractionally lower in August to 89.8 from 90.0 in July, falling short of expectations for a moderate increase. The Index […]

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Market Perspectives (August 2016)

August 22, 2016

Executive Summary U.S. equity markets enjoyed a strong month as anxiety levels dropped from their post-Brexit highs and volatility remained subdued. Small-caps took the lead with the Russell 2000 gaining 6.0%, followed by mid-caps with 4.6%, and large-caps adding 3.7%. International stocks finished the month on a high note as well, with stocks in developed […]

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July Retail Sales Research Notes

August 12, 2016

Retail sales flat in July, fall short of expectations The recent resurgence in the labor market conditions resulted in stronger job growth, but did nothing to embolden consumers to increase spending. The result? An unquestionably disappointing month for retailers in July. Retail sales were flat for the month, easily falling short of expectations for a […]

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July’s Employment Situation Research Notes

August 5, 2016

Strong job gains in July easily exceed expectations; jobless rate steady at 4.9% The jobs market took another step forward in July, posting strong job gains for the second consecutive month.  The tally of 255,000 new jobs created during the month was lower than the upwardly revised 292,000 in June, but easily exceeded consensus expectations […]

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