1. Art and Diseño

January 28, 2015
Economics Group
John E. Silvia, Chief Economist
[email protected] ● (704) 410-3275
FOMC: Steady Helm Despite Some Choppy Waters
In the face of “nearly balanced risks,” the helm at the FOMC keeps a steady course waiting for new weather
signals. Future indications from the labor market, inflation and global growth will provide the signals.
Unemployment Forecast
Nearly Balanced Risks: On the Plus Side
Economic activity picked up in the second half of 2014 and labor market
conditions continue to improve. Total nonfarm payroll employment
expanded faster than generally expected and the unemployment rate fell
more quickly than expected (top graph). Job openings have also improved,
suggesting further gains ahead. Our outlook is for real economic activity to
continue to improve at a 2.5 percent-plus pace for the first half of 2015 and
thereby lead to further improvements in the labor market. Our mid-2015
unemployment rate forecast is for 5.4 percent, which is in line with many
estimates of full employment. Given these gains in jobs and aggregate
wages & salaries, along with home prices and consumer confidence, the
consumer is on the upswing as the economy starts 2015. Moreover,
government spending is now adding to growth in the economy.
Fed Central Tendency Forecast vs. Wells Fargo Forecast
11%
11%
10%
10%
9%
9%
8%
8%
7%
7%
5.7%
5.2%
6%
5%
4.8%
4%
3%
Lest We Forget: The Global Outlook? The Dollar?
While the FOMC did not specifically note global economic conditions as a
risk, it did by de facto when adding “international developments” onto its
list of information to take account of when raising rates. Economic
weakness in the Eurozone, accompanied by uncertainty surrounding the
Greek election, indicates continued downside risk for the international
outlook. The sharp drop in oil prices prompted a cut in rates by the Bank of
Canada. Trade and capital flow concerns prompted action by the Swiss
National Bank and the Monetary Authority of Singapore. Trade concerns
are reinforced by the increase in the dollar’s value, although today’s
statement made no note of the dollar’s recent strengthening. This rise
reduces the competitiveness of U.S. exports but also increases the debt
burden for foreign borrowers who have borrowed in dollars.
Net? Fed Moves in June
Our outlook remains for a Fed move in the funds rate in June. However, at
the March FOMC meeting, new targets for the funds are likely to be
lowered for year-end 2015 as well as for 2016. We expect the move to a
flatter yield curve to persist in 2015. We will watch inflation carefully,
though, as that remains the primary risk to a later liftoff.
2%
Central Tendency Forecast Range
Historical Unemployment Rate
1%
4%
3%
Q4 Average, FOMC Dec. Forecast
2%
1%
Wells Fargo Economics Forecast
0%
0%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
But What About Inflation? Are We Watching the Core?
The key FOMC phrase is “inflation declined further below the Committee’s
longer-run objective.” Measures of inflation, such as the PCE deflator,
illustrated in the middle graph, continue to run below the 2 percent target.
Significantly, the recent weakness in oil prices will lower the overall PCE
deflator initially, but will also exert some downward pressure on the core
over time. To what extent should the markets and the Fed weigh the overall
versus the core deflator? In addition, how much of the decline in oil prices
specifically is considered a more permanent change?
6%
5%
PCE Deflator Forecast
Fed Central Tendency Forecast vs. Wells Fargo Forecast
4.5%
4.5%
Central Tendency Forecast Range
4.0%
Q4-over-Q4
Percent Change
Historical PCE Deflator
FOMC
Dec. Forecast
Wells Fargo Economics Forecast
3.5%
3.0%
4.0%
3.5%
3.0%
2.5%
2.5%
2.1%
2.0%
2.0%
1.4%
1.5%
1.0%
1.1%
0.5%
1.5%
1.0%
0.5%
0.0%
0.0%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Yield Curve
U.S. Treasuries, Active Issues
4.5%
4.5%
4.0%
4.0%
3.5%
3.5%
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
January 26, 2015
0.5%
December 29, 2014
0.5%
January 27, 2014
0.0%
0.0%
Source: Federal Reserve Board, U.S. Depts. of Commerce and Labor, Bloomberg LP and Wells Fargo Securities, LLC
Wells Fargo Securities, LLC Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
(704) 410-1801
(212) 214-5070
[email protected]
John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
[email protected]
Mark Vitner
Senior Economist
(704) 410-3277
[email protected]
Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
[email protected]
Sam Bullard
Senior Economist
(704) 410-3280
[email protected]
Nick Bennenbroek
Currency Strategist
(212) 214-5636
[email protected]
Eugenio J. Alemán, Ph.D.
Senior Economist
(704) 410-3273
[email protected]
Anika R. Khan
Senior Economist
(704) 410-3271
[email protected]
Azhar Iqbal
Econometrician
(704) 410-3270
[email protected]
Tim Quinlan
Economist
(704) 410-3283
[email protected]
Eric Viloria, CFA
Currency Strategist
(212) 214-5637
[email protected]
Sarah Watt House
Economist
(704) 410-3282
[email protected]
Michael A. Brown
Economist
(704) 410-3278
[email protected]
Michael T. Wolf
Economist
(704) 410-3286
[email protected]
Zachary Griffiths
Economic Analyst
(704) 410-3284
[email protected]
Mackenzie Miller
Economic Analyst
(704) 410-3358
[email protected]
Erik Nelson
Economic Analyst
(704) 410-3267
[email protected]
Alex Moehring
Economic Analyst
(704) 410-3247
[email protected]
Donna LaFleur
Executive Assistant
(704) 410-3279
[email protected]
Cyndi Burris
Senior Admin. Assistant
(704) 410-3272
[email protected]
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