Beige Book Suggests Continued Moderate Economic Growth

The latest edition of the Federal Reserve’s (Fed) Beige Book, released Wednesday, October 18, 2017, continued to deliver a positive view of the U.S. economy. The Beige Book is a qualitative assessment of the domestic economy and each of the 12 Fed districts individually. The report is prepared eight times per year, ahead of each Federal Open Market Committee (FOMC) meeting — the next of which is set to take place from October 31 to November 1, 2017. We believe that the Beige Book is best interpreted by measuring how key words change over time. The qualitative inputs for the

Mortgage-backed securities (MBS) have been one of the best performing high-quality asset classes over the past month, even in the face of Federal Reserve (Fed) balance sheet normalization. The lower interest rate sensitivity of MBS relative to other high-quality bond sectors accounts for some of its recent strength, though spreads (the yield differential between MBS and Treauries) have also tightened considerably since the beginning of September. We continue to believe that the near-term implications of balance sheet normalization will be minimal for the MBS sector, but over time the impact could become larger for agency-backed securities. Gi

The recently released minutes from the Federal Reserve’s (Fed) September policy meeting, along with the Consumer Price Index (CPI) and Producer Price Index (PPI) data, have kept the markets focused on inflation. Inflation is half of the Fed’s “dual mandate” to maximize sustainable employment and keep inflation low and stable. These two mandates often conflict and usually require a balancing act. Getting to maximum employment usually implies that the Fed should be more accommodative; keeping a lid on inflation implies that it should be more restrictive.

Looking at the current situation, there’s little

The U.S. dollar has lagged other currencies so far this year, as persistently low inflation suggested that the Federal Reserve (Fed) would not be as aggressive as global investors originally feared. However, recent Fed announcements — including an official start to long-awaited balance sheet normalization, as well as a refusal to back away from a potential rate hike in December — have caused market participants to reexamine the dovish Fed thesis, which has led to a stronger dollar over the past month. So, where does the dollar go from here? We believe that the combination of fundamental factors, such as disparities in major centra