Bruce Jay, President & CEO
Valley Republic Bank
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• Rearrange these letters to spell out an
important part of the body that is more
useful when erect:
P-N-E-S-I
• Those who spelled “SPINE” became
doctors.
• I became a banker!
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Two Major Financial Markets:
• Stocks / Equities
• Bonds / Debt (Fixed Income)
• Government
• Corporate
• Consumer
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Interest Rates
• Nominal (e.g., rate on a home loan)
• Real = Nominal ± Inflation and uncertainties
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Traditional Treasury Yield Curve
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History – Last 30 Years
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Today’s Question
What is normal??
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Government Policies (Financial)
• Fiscal – President & Congress
• Taxes
• Budget
• Spending
• Monetary – Federal Reserve Bank
• Interest Rates
• Money Supply
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A look at the Federal Reserve Bank (FRB)
Federal Reserve Board of Governors
Janet Yellen, Chair
+ Six board members
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Federal Open Market Committee (FOMC)
• Branch of FRB
• Determine Direction of Monetary Policy
• FOMC consists of
• 7 FRB Governors
• 5 Rotating FRB Presidents
• 12 Total members
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Role (Lens) of the Federal Reserve
Congressional Mandate
• Maximum Employment (Natural Rate)
• Price Stability (Inflation)
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Traditional Treasury Yield Curve
Fed rate changes
are only to
overnight Fed
Funds Rate.
Market reacts to
all longer term
rates.
Fed Action
Market Response
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One Exception!!!
Fed has
approximately
$2.5 Trillion in
residential loans
(MBS) on its
balance sheet.
MASSIVE Supply
When will they
sell??
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Interest Rate Forecast
Are we facing a New Normal?
Highly Likely!!!
Why??
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Strong Headwinds
 Domestic
 International
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Global Headwinds
World Conflict
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Global Headwinds
World conflict
Europe’s economy
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Global Headwinds
World conflict
Europe’s economy
Brexit
Flight to quality
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Global Headwinds
China - ??
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•
•
•
Economy slowing
Yuan devalued
Labor costs increasing
R/E bubble
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Domestic Headwinds
• Recession Looming
• Past expansion 45 months
• Current expansion 90 months
• Strength of US trade weighted dollar
• Near all-time high
• Sluggish growth for 8 years
• Oil stabilized
• Inflation is below target
• Flight to quality from overseas
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The
“Trump”
Effect
Risk premiums are excessive, may fall when
Trump’s promises are better understood
Growth boosters may be delayed.
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Recent Market Changes – 90 Days
• Stock market up
• 10yr Treasury yields up 0.75%
• Fed increased FF rate 0.25%
Since Election:
• Substantial premium now in market
• Will expectations materialize?
• When?
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FTN Interest Rate Forecast
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On a Positive Note…
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•
•
Trade deficit expected to narrow
Exports to increase
As soon as…
Tomorrow!!
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Good News!
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Good News!
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Conclusion