 |
|
Volume 7, Issue 20
|
go back
>> |
|
|
Volume 8, Issue 9 |
May 3, 2010
|
|
The
Federal Reserve/Monetary Policy
· In last Wednesday's policy statement (April 28), the Fed continued
its pledge of "exceptionally low levels of the Federal funds rate
for an extended period." There were further slight upgrades to the
Fed's assessment of the economy and the Fed repeated that financial
market conditions remain supportive of economic growth, which the
Fed expects to be "moderate for a time." The Fed continued to say
that "inflation is likely to be subdued for some time." Although the
economy has been recovering for 10 months, the Fed funds rate is
likely to be <0.25% through at least year end.
· Monetary policy appears stimulative based on a negligible Fed
funds rate and an unprecedented jump in Federal Reserve credit.
Total outstanding bank loans appear to be stabilizing after the
steepest drop since the Great Depression. Very rapid money growth in
2008 and 2009 has unwound as more confident investors have shifted
dollars from low-yielding bank deposits to bonds, stocks and
commodities. Given the economic trauma of 2008 and 2009 and huge
gyrations in monetary data, there is more uncertainty than usual
about the timing and impact of Fed actions on economic activity.
· Appearing last week before the National Commission on Fiscal
Responsibility and Reform, Bernanke cited the "basic laws of
arithmetic" and said, "Unfortunately, we cannot grow our way out of
this (Federal deficit) problem. No credible forecast suggests that
future rates of growth of the U.S. economy will be sufficient to
close these deficits without significant changes to our fiscal
policies." He added that our nation "...will have to choose among
making modifications to entitlement programs such as Medicare and
Social Security, restraining Federal spending on everything else,
accepting higher taxes, or some combination thereof..."
The Economy/Inflation
· Real GDP grew at a 3.2% rate (preliminary) in the first quarter
and the 10-month-old recovery looks sustainable. Aggregate dollar
demand (nominal/current dollar GDP) should rise 4% to 4.5% this year
and 4.5% to 5% in 2011 vs. -1.3% in 2009. Real GDP should rise 3.25%
to 3.5% this year and next vs. a -2.4% in 2009. The recovery will be
led by business investment in inventory and equipment, exports,
housing and Federal government purchases. Consumer and state and
local government spending will lag and commercial construction
decline sharply.
· In last Wednesday's policy statement, the Fed said: "With
substantial resource slack continuing to restrain cost pressures and
longer-term inflation expectations stable, inflation is likely to be
subdued for some time." Core consumer price inflation has been
running below the Fed's presumed comfort zone of 1.5% to 2%.
Commodity price indexes have leveled off in the past six months
following a strong gain. The dollar has been modestly strong in
currency markets, especially vs. the Euro. The private industry
employment cost index rose at a 2.4% annual rate in the first
quarter as benefit costs accelerated. The index was up 1.6% yr/yr.
The 10-year inflation rate forecast implied in Treasury
inflation-protected bonds (TIPs) yields was a 2.4% at Friday's
close, substantially above the recent core inflation rate.
Financial Markets
· Fundamentally, the Fed's monetary policy should be supportive of
stock and bond markets at least through year end, 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
(a leading indicator) 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 15 vs. a
19-average over the past 22 years.
· Fiscal problems in Europe have caused some "flight to quality"
demand for dollar assets. Bond yields have declined some,
especially on Treasury bonds, but credit quality bond yield spreads
are in their historical normal range (Bond Market Barometer). Record
dollar issuance of junk bonds in March and April are evidence of
much improved credit availability. Treasury bonds may slightly
under-perform other bond sectors as Treasury bond supply rises to
fund the large Federal deficit.
· Despite their strong advance, stocks will likely outperform
Treasury bonds and cash in the year ahead, but the strongest part of
the rally - fueled by the easing of monetary policy and the related
drop in high-yield bond yields - has very likely already occurred.
Stocks and high-yield corporate bonds obviously embody more risk
following their rebound in the past 14 months.
|
|
|
|
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 |
|
Economic Outlook
|
|
|
|
|
| Qtr. 4 | Q1 | Q2 | Q3 | Q4 | 2008 | 2009 | 2010 | | 5.6 | 3.2 | 3 | 3.4 | 3.6 | 0.4 | -2.4 | 3.3 | | 2.5 | 1.5 | 1.4 | 1.5 | 1.5 | 3.3 | 0.2 | 1.8 | | 1.8 | 0.6 | 1.2 | 1.3 | 1.3 | 2.4 | 1.5 | 1.2 | | 3.47 | 3.72 | 3.85 | 4.1 | 4.25 | 3.67 | 3.26 | 3.98 | | 0.15 | 0.13 | 0.17 | 0.2 | 0.2 | 1.98 | 0.18 | 0.18 | | 17.16 | 18.59 | 19.25 | 20.35 | 21.4 | 49.51 | 56.86 | 79.59 | | n/a | 83.9 | 39.4 | 29 | 24.7 | -40 | 14.8 | 40 | | 5.66 | 5.46 | 6.05 | 6.15 | 6.35 | 28.38 | 22.41 | 24.01 | | -20.8 | -8.4 | 11.2 | 15 | 12.2 | 2.3 | -21 | 7.1 | | 1083.3 | 1118.1 | 1210 | 1245 | 1275 | 1221.3 | 944.8 | 1212 | | 18.8 | 38.4 | 35.7 | 25 | 17.7 | -17.3 | -22.6 | 28.3 |
|
|
|
|
Real GDP, % annual rate |
|
Inflation, PCE % an. rate |
|
Core inflation (ex food&energy) |
|
10 Year Treasury bond (%) |
|
Fed funds rate (%) |
|
S&P 500 operating earnings($s) |
|
S&P 500 op. earn. Yr/Yr % chg. |
|
S&P 500 dividends ($s) |
|
S&P 500 div Yr/Yr % chg. |
|
S&P 500 Index (average) |
|
S&P 500 Index, Yr/Yr % chg. |
|
| |
|
Economic and Financial Data |
 |
|
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
|
|
|
|
