1. © 2016 PFM Asset Management LLC The Federal Reserve Open Market Committee: Who They Are and Why They Matter August 4, 2016 PFM Asset Management LLC 1820 East Ray Road Chandler, AZ 85225 (855) 885-9621 Presented by Paulina Woo & Luke Schneider, Directors

2. © 2016 PFM Asset Management LLC 11 Discussion Items Introduction to the Federal Reserve Bank System and Open Market Committee Fed Policy and Interest Rates “Raise your hand, we’ll talk, no big whoop.” With Luke and Paulina

3. © 2016 PFM Asset Management LLC 22 Intro to the...

4. © 2016 PFM Asset Management LLC 33 Structure Source: Federal Reserve.

5. © 2016 PFM Asset Management LLC 44 Dual Mandate... Dueling Mandates

6. © 2016 PFM Asset Management LLC 55 Federal Open Market Committee Source: Federal Reserve. A Committee within the Federal Reserve System charged with overseeing U.S. open market operations. 2016 Voting Members of FOMC Janet Yellen, Board of Governors, Chairman William Dudley, New York, Vice Chairman Lael Brainard, Board of Governors James Bullard, St. Louis Stanley Fischer, Board of Governors Esther L. George, Kansas City Loretta J. Mester, Cleveland Jerome H. Powell, Board of Governors Eric Rosengren, Boston Daniel K. Tarullo, Board of Governors To be appointed by Senate, Board of Governors The FOMC consists of twelve members: Seven members of the Board of Governors (appointed President to serve 14-year terms). President of the Federal Reserve Bank of NY. Four of the remaining eleven Reserve Bank presidents (serve one year terms on a rotating basis). Eight scheduled meetings a year. Reviews economic and financial conditions. Makes key decisions about rates and growth of money supply.

7. © 2016 PFM Asset Management LLC 66 FOMC Dove/Hawk Scale Source: Thompson Reuters; 01/07/16. Doves: Support stimulus Hawks: Oppose stimulus

8. © 2016 PFM Asset Management LLC 77 Janet Yellen: Federal Reserve Chair Education -Brown University: B.A. in Economics -Yale University: Ph.D. in Economics Career -Professor at University of California, Berkeley since 1980 -Served on the Federal Reserves Board of Governors from 1994-1997 -Chair of the President’s Council of Economic Advisers from 1997-1999(Clinton Administration) -President of the Federal Reserve Bank of San Francisco from 2004-2010 -Nominated in 2010 as Vice-Chair of the Federal Reserve System (Obama Administration) Views -Generally considered a “dove” and Federal Reserve insider that is likely to continue the monetary policy path of the current Fed Source: Federal Reserve.

9. © 2016 PFM Asset Management LLC 8 The FOMC’s Historical Reaction to Employment Source: Bloomberg. Shaded areas denote recessions as designated by the NBER. Updated through June 2016. Boxes identify the first step in each Fed tightening sequence. Shaded areas designate periods of recession.

10. © 2016 PFM Asset Management LLC 99 Labor Market Continues to Strengthen Source: Bureau of Labor Statistics. As of 06/30/2016.

11. © 2016 PFM Asset Management LLC 10 Inflation Rising Slowly Source: Bloomberg as of 05/31/2016.

12. © 2016 PFM Asset Management LLC 11 Indicator2013201420152016 YoY PCE – Core 1.5%1.4% 1.6% PCE – Aggregate 1.4%0.8%0.7%0.9% CPI – Core 1.7%1.6%2.1%2.2% CPI – Aggregate 1.5%0.8%0.7%1.0% PPI – Core 1.6%1.7%1.8%1.6% PPI – Aggregate 1.4%-0.6%-2.7%-2.3% Gold -28.3%-1.4%-10.4%12.0% Crude Oil (WTI) 7.2%-45.9%-30.5%-17.1% US$ per Euro 4.2%-12.0%-10.2%-1.2% Avg. Hourly Earnings 2.0%1.7%2.6% Key Inflation Indicators Source: Bloomberg. PCE, CPI, and PPI 2016 YoY as of 05/31/2016. Gold, Oil, Euro, and Earnings as of 06/30/2016.

13. © 2016 PFM Asset Management LLC 12 Fed Policy & Interest Rates

14. © 2016 PFM Asset Management LLC 13 Tools of the FOMC Open market operations: Fed buys and sells U.S. government securities in the open market. –Buying securities = increased money supply in the banking system, which means banks have more money to make loans and effectively lowers interest rates. –Selling securities = decreased money supply in the banking system, which means banks have less money to make loans and effectively raises interest rates. Reserve requirements: Fed decides on a certain percent of deposits banks must keep with the Federal Reserve. Banks borrow from Fed or each other to compensate for any shortfall in their reserve requirement. –Fed increases reserve requirement = banks have less money to lend, interest rates higher –Fed decreases reserve requirement = banks have more money to lend, interest rates lower Discount rate and Fed funds target rate –Discount rate—set by Fed and is the rate banks get when borrowing from Fed. –Fed funds rate—the rate at which banks charge each other for loans in the federal funds market.

15. © 2016 PFM Asset Management LLC 14 Fed Policy Normalization Principles Reinvestments will continue beyond first rate hike –No asset sales are planned at this time Fed Funds Rate hike is data dependent – no preset course Interest on Excess Reserves (IOER) and Reverse Repo Program Facility (RRP) will be used to steer rate Continue to target a range for the federal funds rate that is 25 basis points wide. Details subject to ongoing economic data Source: Federal Reserve September 2014 and March 2015

16. © 2016 PFM Asset Management LLC 15 FOMC Key Policy Tool Source: Bloomberg, Federal Reserve. Current Range: 25-50bps

17. © 2016 PFM Asset Management LLC 16 Fed Largest Holder of U.S. Debt Source: Bloomberg as of 04/30/2016. Holders of U.S. Treasuries ($ billions) 04/201604/201504/2014 Federal Reserve 2,461 2,460 2,319 Total Foreign Holders 6,239 6,138 5,959 China 1,243 1,263 Japan 1,143 1,216 1,210 Caribbean 361 296 246 OPEC 281 293 255 Ireland 258 216 174 Brazil 249 263 246 Switzerland 230 216 178 Luxembourg 221 171 141 United Kingdom 217 186 172 Other Foreign Holders 2,036 2,018 2,074 Other Holders 6,677 5,837 5,609 Total US Debt 15,377 14,435 13,887

18. © 2016 PFM Asset Management LLC 17 Federal Reserve Treasury Holdings Source: Bloomberg as of 06/30/2016. The Fed has announced its intentions to continue to reinvest maturities and portfolio income “until normalization of the level of the federal funds rate is well under way.”

19. © 2016 PFM Asset Management LLC 18 FOMC Statement Highlights Source: Federal Reserve. June 15 The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household spending has strengthened… the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed income has been soft. Inflation has continued to run below the Committee’s 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined… inflation is expected to remain low in the near term. The Committee continues to closely monitor inflation indicators and global economic and financial developments. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 0.25 – 0.50%. The stance of monetary policy remains accommodative… In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.

20. © 2016 PFM Asset Management LLC 19 Latest FOMC Interest Rate Expectations Source: FOMC; Fed Funds Futures as of 06/30/2016. Individual dots represent each of the 17 FOMC members’ judgment of the midpoint of the appropriate target range for the federal funds rate. One participant did not submit longer-run projections in the June 2016 meeting. 20162017 2018 Longer Term Fed members lowered expectations in June

21. © 2016 PFM Asset Management LLC 20 Negative Interest Rates 20

22. © 2016 PFM Asset Management LLC 21 Impact of Global Central Bank Policies Source: Bloomberg, as of 06/30/2016.

23. © 2016 PFM Asset Management LLC 22 Rising Tide of Negative Global Yields 22

24. © 2016 PFM Asset Management LLC 23 Post-Brexit Fed Rate Hike Probability Source: Bloomberg WIRP, as of 06/30/16. Meeting06/30/1606/23/1605/31/16 07/27/160%10%53% 09/21/160%32%59% 11/02/160%35%62% 12/14/169%50%74% 02/01/179%52%77% Probability of Fed Rate Hike

25. © 2016 PFM Asset Management LLC 24 What to Watch For Continued progress toward FOMC objectives –Strength in employment sector –Inflation growth towards 2% target Statements, data releases, and FOMC member public comments –Composition of FOMC voting members Fed funds futures market Actions by other central banks Status of global economies (e.g. Britain, China, Brazil, Italy) Catastrophic events

26. © 2016 PFM Asset Management LLC 25 Questions?

27. © 2016 PFM Asset Management LLC 26 This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. Disclaimer