Raymond James Economic Research At the September 16-17 monetary policy meeting, Fed officials revised their projections of growth, unemployment, and inflation, as well as the “appropriate” level of the federal funds rate at the end of each of the next few years. Once again, the dots in the dot plot generally drifted a bit lower. Most Fed officials believe that economic conditions will warrant at least one rate increase by the end of the year. In recent public speeches, officials have repeated this sentiment. Fed Chair Janet Yellen presented a lengthy analysis of the inflation dynamics as justification for normalization. Views continued to vary widely on the path of rates in 2016 and 2017. Target Federal Funds Rate at Year-End, % 4 each point represents a projection by a Fed governor or district bank president 4 3 3 2 2 Projections: 1 1 June 17 Sept.

17 0 -1 0 Source: Federal Reserve 2015 2016 -1 2017 2018 Long Run While there appears to be a Fed consensus around the initial timing, the financial markets are doubtful. The federal funds futures are signaling less than even odds of a move this year. Something is going to have to give.

Either the Fed will shift its expectations to a later initial move or the markets will have to adjust. Notably, Fed officials have to consider financial market stability and possible reactions as they decide on policy. In its decisions to delay the initial move (September 17) the Fed is citing the possible impact on the U.S. economy of global economic and financial developments.

That is, officials are not reacting specifically to what’s going on in the rest of the world, but to the potential impacts that the rest of the world may have on the U.S. As Vice Chair Stanley Fischer noted in August, “in maintaining a stable and strong macroeconomic environment at home, we will be best serving the global economy as well.” The strong dollar and soft global economy have put downward pressure on inflation, but Fed officials believe that this impact will be transitory. Note that China’s holdings of U.S. Treasuries are concentrated at the short-end of the yield curve.

Sales of Treasuries (to keep the Chinese currency from weakening) should not have a big impact on U.S. bond yields. House Speaker John Boehner resigned from his position as Speaker of the House effective October 30. That apparently was the price of working with the Democrats to fashion a continuing resolution to fund the government (to December 11).

Treasury has indicated that November 5 will be the dropdead date for raising the debt ceiling (about a month earlier than many had anticipated). The new speaker is expected to be less willing to compromise. However, Boehner is still speaker and there ought to be some haste to work out a deal on a full budget and an increase in the debt ceiling by the end of the month.

If that works out, that will be a major hurdle cleared for the financial markets. If not, we would likely see a government shutdown and some risk of a U.S. default. Looking ahead, growth in real GDP is expected to be moderate in the near term, reflecting ongoing strength in the domestic economy and some restraint in net exports and inventories. Inflation should move gradually higher as commodity prices and the dollar stabilize. GDP ( contributions) consumer durables nondurables & services bus.

fixed investment residential investment Private Dom Final Sales government exports imports Final Sales ch. in bus. inventories 4Q14 2.1 0.4 2.4 0.1 0.3 3.9 -0.3 0.7 -1.6 2.1 0.0 1Q15 0.6 0.1 1.0 0.2 0.3 2.0 0.0 -0.8 -1.1 -0.2 0.9 2Q15 3.9 0.6 1.9 0.5 0.3 3.9 0.5 0.6 -0.5 3.9 0.0 3Q15 2.0 0.6 1.9 0.5 0.3 3.9 0.2 -0.2 -0.5 2.9 -0.8 4Q15 2.3 0.4 1.6 0.5 0.3 3.3 0.2 0.3 -0.6 2.7 -0.3 1Q16 2.6 0.4 1.5 0.5 0.2 3.1 0.2 0.4 -0.6 2.6 0.0 2Q16 2.7 0.4 1.5 0.5 0.2 3.0 0.2 0.5 -0.6 2.7 0.0 3Q16 2.7 0.3 1.5 0.5 0.2 3.0 0.3 0.5 -0.6 2.7 0.0 4Q16 2.6 0.3 1.5 0.5 0.2 2.9 0.2 0.5 -0.6 2.6 0.0 2014 2.4 0.4 1.4 0.1 0.3 3.2 -0.1 0.4 -0.6 2.4 0.1 2015 2.5 0.5 1.7 0.4 0.3 3.5 0.1 0.2 -0.8 2.4 0.2 2016 2.6 0.4 1.6 0.5 0.3 3.2 0.2 0.3 -0.6 2.8 -0.2 2017 2.5 0.3 1.4 0.5 0.2 2.8 0.2 0.5 -0.6 2.5 0.0 Unemployment, % NF Payrolls, monthly, th. 5.8 324 5.6 195 5.4 231 5.1 167 5.0 175 4.9 185 4.8 185 4.7 180 4.7 175 6.2 260 5.3 192 4.8 181 4.8 163 Cons.

Price Index (q/q) excl. food & energy PCE Price Index (q/q) excl. food & energy -0.9 1.5 -0.4 1.0 -3.1 1.7 -1.9 1.0 3.0 2.5 2.2 1.9 1.5 1.6 1.3 1.3 0.5 1.7 0.8 1.6 1.8 1.8 1.6 1.6 1.8 1.8 1.7 1.7 1.9 1.8 1.8 1.7 1.9 1.9 1.8 1.7 1.6 1.7 1.4 1.5 0.1 1.8 0.3 1.3 1.6 1.8 1.5 1.6 1.9 1.9 1.8 1.7 Fed Funds Rate, % 3-month T-Bill, (bond-eq.) 2-year Treasury Note 10-year Treasury Note 0.10 0.0 0.5 2.3 0.11 0.0 0.6 2.0 0.13 0.0 0.6 2.2 0.14 0.1 0.7 2.2 0.19 0.1 0.9 2.4 0.20 0.2 1.1 2.7 0.40 0.4 1.4 2.9 0.67 0.7 1.6 3.1 0.93 0.9 1.9 3.2 0.09 0.0 0.5 2.5 0.14 0.1 0.7 2.2 0.55 0.6 1.5 3.0 1.55 1.5 2.4 3.3 © 2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.

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