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Volume 7, Issue 20
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Volume 8, Issue 4 |
February 22, 2010
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The Federal Reserve/Monetary Policy
· Even though the Fed had given advanced warning that it would soon
raise the discount rate for technical reasons, Thursday's increase
in that rate still was initially shocking and markets over-reacted.
Markets quickly calmed on Friday due both to assurances by the Fed
that the Fed funds rate would remain <0.25% for an extended period
and to good CPI inflation news.
· Bernanke delivers his semi-annual report on monetary policy to
Congress on Thursday. He will say that the Fed will continue a
stimulative policy but also describe how the Fed is exiting some of
its special liquidity programs. The funds rate will probably be
<0.25% through the third quarter, but more hawkish Fed policymakers
may dissent from the majority if the moderate recovery continues and
the majority votes to keep the "extended period" language in the
Fed's policy statements (next policy meeting is March 16).
· Monetary policy appears stimulative based on a negligible fed
funds rate and an unprecedented jump in Federal Reserve credit and
Fed direct support of credit markets. However, a decline in bank
loans is the steepest since the Great Depression and very rapid
money growth in 2009 has unwound. Given the unprecedented Fed
actions of the past 16 months, there is even more uncertainty that
usual about the impact of current monetary policy.
· Fiscal policy appears stimulative with the Federal deficit at
unprecedented levels. President Obama appointed a bipartisan
commission to make recommendations for reducing deficits. Longer
run, prudent U.S. fiscal policy requires a cut in entitlement
spending - Medicare, Medicaid, Social Security. But stimulating the
economy is the short-term priority with November elections looming,
the unemployment rate high, and interest rates still low.
The Economy/Inflation
· While economic growth will slow this quarter from last quarter's
unsustainable 5.7% rate, it is very likely the economic recovery
that began in the third quarter of 2009 will endure. Aggregate
dollar demand (nominal/current dollar GDP) should rise 4+% in 2010
and 5% in 2011 vs. -1.3% in 2009. Real GDP should rise 3+% this year
and next vs. a -2.4% in 2009. The recovery will continue to be led
by business investment in inventory and equipment, exports, housing
and Federal government purchases. Consumer spending will lag and
commercial construction decline.
· Inflation news was mixed last week. Most importantly, core
consumer (CPI) inflation currently appears to be at the low end of
the Fed's perceived comfort zone of 1.5% to 2%. Also, the dollar has
strengthened in currency markets in the past two-and-a-half months.
However, producer (wholesale) prices and import prices jumped in
January and commodity prices rebounded last week. The 10-year
inflation rate forecast implied in Treasury inflation-protected
bonds (TIPs) yields was a moderate 2.28% at Friday's close.
Financial Markets
· Financial markets recovered quickly from the mini "Flight to
Quality" that occurred early this month.
· Fundamentally, the Fed's monetary policy should remain supportive
of markets, i.e. negligible short-term interest rates will keep
investors seeking higher yields in stocks, bonds, and commodities.
· Sustaining the economic recovery will likely require stock market
strength. Stocks appear fairly valued vs. Baa corporate bonds (Stock
Market Barometer). Based on forecasted 2010 earnings (subject to
considerable forecast error), the price/earnings ratio for the S&P
500 at Friday close was 14.6 versus a 19 average over the past 21
years.
· There is a good chance stocks will outperform Treasury bonds and
cash in the year ahead, but the strongest part of the rally - fueled
by collapsing high-yield bond yields - has likely already occurred.
· The bond market rally is probably over, but the economic recovery
is not likely to be strong enough to push long rates up strongly
this year. However, there is some risk that large Federal deficits
will push up rates more than expected.
· Credit quality bond yield spreads widened a little in recent days,
but they remain in their historical normal range (Bond Market
Barometer). Treasury bonds may slightly under-perform other bond
sectors as Treasury bond supply rises to fund the large federal
deficit.
· Mortgage rates remain low and mortgage lending has picked up. If
the Fed ends its mortgaged-backed purchases at the end of March as
planned, mortgage rates will likely rise somewhat relative to
Treasury bond rates.
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Economics Today is a monthly e-mail service provided by
Reliance Trust Company.
Main office: 1100 Abernathy Road, 500 Northpark, Suite 400, Atlanta, GA
30328 |
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Economic Outlook
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Qtr. 4 |
Q1 |
Q2 |
Q3 |
Q4 |
2008 |
2009 |
2010 |
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5.7 |
2.2 |
3.6 |
3 |
3.6 |
0.4 |
-2.4 |
3.1 |
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2.7 |
1.5 |
1.4 |
1.5 |
1.4 |
3.3 |
0.2 |
1.8 |
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1.4 |
1.4 |
1.3 |
1.4 |
1.5 |
2.4 |
1.5 |
1.4 |
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3.47 |
3.78 |
3.9 |
4.1 |
4.25 |
3.67 |
3.26 |
4.01 |
|
0.15 |
0.13 |
0.15 |
0.15 |
0.4 |
1.98 |
0.18 |
0.21 |
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17.23 |
17 |
18.65 |
19.9 |
20.5 |
49.51 |
56.93 |
76.05 |
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n/a |
68.2 |
35 |
26.1 |
19 |
-40 |
15 |
33.6 |
|
5.66 |
5.5 |
5.95 |
6 |
6.1 |
28.38 |
22.41 |
23.55 |
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-20.8 |
-7.7 |
9.4 |
12.1 |
7.8 |
2.3 |
-21 |
5.1 |
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1083.3 |
1110 |
1195 |
1230 |
1255 |
1221.3 |
944.8 |
1197.5 |
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18.8 |
37.4 |
34 |
23.5 |
15.8 |
-17.3 |
-22.6 |
26.8 |
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Real GDP, % annual rate |
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Inflation, PCE % an. rate |
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Core inflation (ex food&energy) |
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10 Year Treasury bond (%) |
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Fed funds rate (%) |
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S&P 500 operating earnings($s) |
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S&P 500 op. earn. Yr/Yr % chg. |
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S&P 500 dividends ($s) |
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S&P 500 div Yr/Yr % chg. |
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S&P 500 Index (average) |
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S&P 500 Index, Yr/Yr % chg. |
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Economic and Financial Data |
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Disclaimer
The material herein is based on data
from sources considered to be reliable,
but it is not guaranteed as to accuracy,
does not purport to be complete and is
subject to change without notice. It is
not to be construed as a representation
by us or as an offer or the solicitation
of an offer to sell or buy any security.
Any opinions expressed are subject to
change. From time to time, this firm,
its affiliates, and/or its individual
officers and/or members of their
families may have a position in the
subject securities which may be
consistent with or contrary to the
recommendations contained herein; and
may make purchases and/or sales of those
securities in the open market or
otherwise. This communication is for
informational purposes only. Use by
other than intended recipients is
prohibited. Sender accepts no liability
for any errors or omissions arising as a
result of transmission. Any comments or
statements made herein do not
necessarily reflect those of Reliance
Financial Corporation or its affiliates.
Securities and Insurance Products offered through Reliance Securities, LLC. Member FINRA/SIPC.
Not FDIC Insured * No Bank Guarantee * May Lose Value *
Not a Deposit * Not Insured by any Federal Government Agency.
Arnie Dill, Ph.D.
Consulting Economist
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