1. Nicholas S. Perna February 17, 2017 Prepared for ECUC
FAST LANE or SLOW LANE?
Nicholas S. Perna
February 17, 2017
Prepared for ECUC

2. ITINERARY Current Conditions Outlook Fed Policy Trump Impact
Brexit, Grexit exit
Implications

3. UNUSUAL RECOVERY
Peak Latest % ch GDP (bil '09 $) 14,992 16, Jobs (000s) 138, ,554 5 Unemployment % Dow Jones 14,165 20,460 44

4. GDP GROWTH SLOW

5. INFLATION MODEST

6. WHY SO SLOW OVERALL?
China slowing: shift to consumer, big imbalances … hurts other economies
Europe sluggish: banking, Greece
Brexit: exiting EU means uncertainty
Modest Long Term economic growth

7. NEAR TERM OUTLOOK WSJ (Feb. '17) 2016 2017 2018 2019
Real GDP % ch
CPI % ch
Unemployment %

8. FED POLICY

9. FED: LEGAL MANDATE
Full Employment 4.5 to 5% unemployment rate Price Stability 2% consumer price increase

10. RATES STARTING TO RISE

11. NEAR FULL EMPLOYMENT

12. NEAR INFLATION GOAL

14. WHEN START UNWINDING QE?
February 10, 2017.
NEED
WHEN START UNWINDING QE?

15. NEAR TERM: Fed and WSJ 2016 2017 2018 2019 Fed funds % 0.6 1.4 2.1 2.9
Fed funds %
10-yr Treasury %

16. LONG TERM: Fed Inflation % ch 2.0 Unemployment % 4.8 Fed funds % 3.1
Real GDP % ch
Inflation % ch
Unemployment %
Fed funds %
10-yr Treasury % e

17. LONG TERM A New Abnormal? Slow growth Modest inflation
Low interest rates

19. WHY LOW LT RATES? Possible explanations
Inadequate demand …fiscal austerity
Secular stagnation
Global savings glut
“ideopathic” …what doctor says when really doesn’t know why

20. LONG TERM: SO WHAT? Lots of negative implications
Increased financial risk: reach for yield
Pension funding even more onerous
Bank/CU profit squeeze from slow loan growth and tight margins

23. TRUMP BUDGET POLICIES
Tax cuts could mean trillions of red ink -- no evidence tax cuts pay for themselves
Trillion $ infrastructure spending
Leave Soc Sec alone and increase defense.

24. ONE TAX PROPOSAL
“Destination cash flow based tax with border adjustment”
AKA: Value-added tax

25. WILL TRUMP MAKE ANY MACRO DIFFERENCE?
Inflation might be higher: somewhat faster GDP, resprictions on imports and immigration, stronger $ exchange rate
But LT GDP growth not much faster
Demographics: 0.5% labor force rise
Productivity: less than 1.5%
Thus: GDP under 2% ... not Trump's 4%

26. BUT ISN'T STOCK MARKET PREDICTING A BOOM?
Stocks responding positively to decreased regulation: Especially for banks
Gut Dodd-Frank
Much lower capital requirements
Weaker Fed
Stock market is not the economy!

27. TRUMP POLICIES: FED Federal Reserve Board: 7 seats
Now have 3 vacancies
Yellen and Fischer leave early next year
Could have huge impact by appointments
Interest rates: depends whether Fed will accommodate his budget deficits ... real
Fed independence at risk

28. BREXIT
June 23, Brits voted to exit European Union. EU is 28 nation agreement for free trade and free immigration and more EMU is 19 countries with Euro currency. UK was never a member Exit takes place over next two years

29. “The British are leaving, the British are leaving!”

30. WHY BREXIT? Concern over immigration/foreigners
Worry over jobs lost to free trade
… sound familiar?

31. BREXIT SO WHAT? Potential for large negative consequences
Slower growth in UK, rest of Europe and elsewhere as trade falls
Stronger U.S. dollar exchange rate means fewer US exports, smaller profits and lower interest rates
So far, small impact from Brexit because hasn’t taken effect yet … maybe it won’t

32. FINALE: IMPLICATIONS
Uncertainty lingers: Trump policies, Brexit, Fed leadership
Fed to continue raising rates
Historically low interest rates likely to continue ... but Trump policies could push rates up
Higher rates: margins? balance sheets?