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Overview
- Outlook for the US economy is favorable but
- core inflation is only at 1.6% instead of 2%
- cutting interest rate by 0.25% from 2.5% to 2.25%
- insurance against downside risk
- global growth is slowing
- trade policy tension is a new stimulus to the equation and it is a concern
- key objectives
- strong job economy
- 2% inflation rate
- adopt an iterative approach by observing how economy reacts to policy changes
Key areas of concern
global growth slow down
- US core inflation rate is at 1.6% – excludes food and energy inflation which are cyclical
- US manufacturing declined in 2019Q1 and 2019Q2
- US business fixed investment slowed in 2019Q1 and fell in 2019Q2
- companies uncertain about investment spending
- not seeing additional demand for products
- June US job growth slowed in 2019Q2
- disinflation rates observed in other countries
- manufacturing in rural China and the EU are slowing
highly leverage business sector within the US
- Business borrowings are excessive
- loans have moved off balance sheet of banks to market based vehicles
Positive signals of sustained US economy
- rising household income drives confidence
- no booming sectors observed hence no concerns for busts
Federal Reserves framework for monitoring risks
- Excessive leverage in the Financial sector
- Excessive asset valuations
- Excessive debt loads in households and business
- Funding risks that could result in sudden shortfall of liquidity
Structure of the US economy
- US capital requirements within banks are at 2X of what is required to tide through tough times
- Allocations
- 70% consumer
- 30% investments and manufacturing
- not growing
- remains healthy
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