Markets and Economy
Weekly Market Update:
March 25, 2019
March 25, 2019
Lessons From Last Week
- The news flow may look squishy. The economy doesn’t. That’s what the steady pace of jobless claims implies. That’s what matters. The prospect of slower growth is no issue when the job market is flat-out tight.
- The Federal Reserve released the script to its patience mantra, with the majority now thinking that no change in the funds rate will be the most appropriate posture for 2019. Fed policymakers formally abandoned an idea that has been incubating in its interest rate forecasts since the fall of 2012, that policy might, in the not-too-distant-future, need to turn a little restrictive—its interest rate forecasts showed rates moving above the neutral rate for a spell. The idea likely was provoked by an assumption that unemployment was and would remain below the Nairu (longer run unemployment). Tame inflation over the past year, despite year-ago worries about overheating, likely has changed minds. And, the Fed continues to chip away at its assumption about the Nairu (the median view eased to 4.3 percent from 4.4 percent and the central tendency edged lower to 4.1-4.5 percent). The Fed’s forecasts for future economic activity are less meaningful than what the policymakers think is the appropriate policy for the economic outlook it anticipates. So, the Fed’s forecasts are significant for what they might reveal about the policy reaction function.
- The Fed will stop shrinking its balance sheet by October and then begin to buy up to $20 billion of Treasurys monthly to replace any mortgage-backed securities that are being prepaid in order to keep the size of its balance sheet stable. Prepayment of MBS in excess of $20 billion in any one month will be reinvested back into new MBS. Fed balance sheet expansion essentially transforms government debt into short-term government obligations (reserves at the Federal Reserve).
- The drop in the 10-year US Treasury yield to 2.42 last week shouldn’t be a mystery and it’s not about the economy. Ten-year yields in Germany and Japan fell to -0.03 percent and -0.08 percent, respectively. Global investors have choices and the relative appeal of US assets is pretty stark.
The Week Ahead
- This week’s volley of data isn’t likely to move the Fed policy debate. Jobless claims remain front and center.
- Brexit options got more complex following the EU’s agreement to extend the deadline to April 12. The UK has four options: revoke Article 50 (cancel the nonbinding referendum outcome and remain in the EU); leave without a deal (hard exit); pass Prime Minister May’s withdrawal agreement this Tuesday that would allow for an orderly withdrawal; or petition for an extension beyond April 12. A prolonged delay raises the prospects of other (“softer”) exit options or another referendum.
View our economic commentary disclaimer.