Federal Reserve Predictions 2016

Changed my mind: Analysis below

Here are my predictions for FOMC Interest Rate announcement for 2016. I will circle back and add some notes in order to analyze the outcome of my predictions

Month Prediction
March 2016 March 15/16 – Rates go up .25%
April 2016 April 26/27 – Rates go up .25%
June 2016 June 14/15

Rates stand pat

July 2016 July 26/27

Rates stand pat

September 2016 Sept 20/21

Rates stand pat

November 2016

American Elections Nov 8th 2016

Nov 1/2

Rates stand pat

December 2016 Dec 13/14

Rates go up .25%

Question: When will FOMC raise rates in 2016

Assume that FOMC looks at 5 Open Market conditions and assign a weight to each condition.

In order of priority for FOMC for a rate increase

  1. Inflation and PCE indicators
    1. Weight:35%
  2. GDP
    1. Weight:25%
  3. Global Markets
    1. Weight:20%
  4. Employment Rate
    1. Weight:15%
  5. Fed Balance Sheet
    1. Weight:5%

 

  Inflation PCE Indicators

Weight:35%

GDP

Weight:25%

Global Markets

Weight:20%

Employment Rate

Weight:15%

Fed Balance Sheet

Weight:5%

Outcome:

Fed Target 75

Prediction
Feb 2016 15 25 5 10 5 60  
March 2016 25 – Trending up 25 5 15 – Trending up 5 75 March 15/16 – Rates go up .25%
April 2016 25 25 5 15 5 75 April 26/27 – Rates go up .25%
June 2016 20 25 5 15 5 70 June 14/15

Rates stand pat

July 2016 20 25 5 15 5 70 July 26/27

Rates stand pat

September 2016 20 25 5 15 5 70 Sept 20/21

Rates stand pat

November 2016

American Elections Nov 8th 2016

20 25 5 15 5 70 Nov 1/2

Rates stand pat

December 2016 25 25 10 15 5 80 Dec 13/14

Rates go up .25%

I started my analysis in Feb 2016. Please excuse the format – this was me trying to analyze and organize my thoughts.

  1. Federal Reserve Balance Sheet: http://www.federalreserve.gov/releases/h41/current/h41.htm
    • Current Balance Sheet Value:
      • Feb 10 2016 – Assets:4486278T
      • Feb 10 2016 – Liabilities: 4446766T
      • Equity = Assets – Liabilities
        • Feb 10 2016 – 4486278-4446766 = 39512B
      • Largest chunk of sheet Assets:
        • Securities, unamortized premiums discounts, repurchase agreements and loans: 440762T
          • Securities held outright: 4236672T
            • US Treasury Securities: 2461174T
            • Mortgage backed securities: 1744180T
          • Largest chunk of Liabilities:
            • Federal Reserve Notes: 1373926T – money printed and in circulation
            • Deposits:2783045T
          • Feb 2007
            • Assets = 871 Billion
              • Largest chunk of Assets sheet:
                • Securities, unamortized premiums discounts, repurchase agreements and loans:808935B.
                  • US Treasury: 778889B
                    • Bills: 277019
                    • Notes and Bonds:466675
                  • Liabilities = 840Billion
                    • Largest chunk of liabilities:
                      • Federal Reserve Notes: 769955B – money printed and in circulation
                      • Reverse Purchase Agreement:37336B
                      • Deposits: 22640B
                        • Money that banks are keeping with the Federal Reserve. FED does not pay interest on deposits. They can use this to purchase securities to get interest on them.
                      • FOMC Target:
                      • Trending (up/down):
                      • Priority out of 5: 5
  1. Employment Rate: Readings lower than 300000 jobless claims indicate a healthy jobs market.
    • Current Employment Rate:4.9%
    • FOMC Target: Was 6.5 then 6.2 then 5
    • Trending (up/down): Trend is up(Greater Employment). Lower unemployment rate in the US for 2016
    • Priority out of 5: 4
      • the unemployment rate declines when there is an increase in the employment ratio; this would suggest a stronger economy. On the other hand, the expression also shows that the unemployment rate declines when the labor force participation rate falls; this might signal a weaker economy if there has been an increase in the number of discouraged workers who have given up looking for jobs and left the labor force entirely
  1. GDP: The value of the goods and services produced by the nation’s economy less the value of goods and services used up in the production, adjusted for price changes
    • GDP Rate 2014:16768 T
      • 4 increase in 2015: 17170.432T
    • FOMC Target: Looking for upward trend
    • Trending (up/down): Up
    • Priority out of 5: 2
  2. Inflation Indicators – PCE (Personal Consumption Expenditures), Core Inflation: Personal consumption expenditures (PCE) is the primary measure of consumer spending on goods and services in the U.S. economy. It accounts for about two-thirds of domestic final spending, and thus it is the primary engine that drives future economic growth. Key measure of inflation for FOMC http://www.advisorperspectives.com/dshort/updates/PCE-Price-Index.php. According to long term chart, wages have stagnated thus PCE has dropped to low levels. Check out 1975 data.
    • Current PCE Rate:1.3%
    • Current Core Inflation Rate:2.16%
    • FOMC Target:2%
    • Trending (up/down): holding steady
    • Priority out of 5:1
  3. Global Markets: https://www.census.gov/foreign-trade/statistics/highlights/toppartners.html
    • 2015 numbers Top 15 economies FOMC includes in assessment of world economic affairs: In Billions
      • China – Exports/Imports (116.2/481.9) (16% of total trade)
        • Currently slowing GDP
      • Canada – (280.3/295.2)(15.4%)
        • Currently in recession and slowing GDP
      • Mexico – (236.4/294.7) (14.2%)
        • Slowdown in GDP
      • Japan – (62.5/131.1) (5.2%)
        • Recession, experiencing deflation and have enacted negative interest rates
      • Germany – (49.9/124.1) (4.6%)
      • South Korea – (43.5/71.8) (3.1%)
      • UK – (56.4/57.8) (3.0%)
      • France – (30.1/47.6) (2.1%)
      • Taiwan – (25.9/40.7) (1.8%)
    • Priority out of 5:3

 

“And that house on the hill when you drop like 80
On a down payment thinking damn ain’t life gravy” – J.Rule

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