The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
5/5/2020 November 2014 Quarterly Refunding Report to the Secretary of Treasury U.S. DEPARTMENT OF THE TREASURY Press Center November 2014 Quarterly Refunding Report to the Secretary of Treasury 11/5/2014 November 4, 2014 Le er to the Secretary Dear Mr. Secretary: Since the Commi ee last met in early August, the economic expansion has remained vigorous, with overall real GDP expanding at a 3.5% annual rate in the third quarter. The first half gyra ons in growth have given way to a steadier pace more recently, and most available indicators from October suggest that the momentum of economic ac vity remained favorable early in the fourth quarter. The specter of a global growth slowdown has loomed over the US economic outlook, although recently, somewhat more favorable data from key trading partners has helped to partly alleviate financial market concerns about the spillover to domes c economic performance. While the strengthening dollar does provide a headwind for US exporters, the decline in petroleum prices entails significant near-term support for consumer purchasing power. On balance, most forecasters con nue to expect domes c resilience and look for above-trend growth in the medium-term. Real consumer spending has expanded at a modest pace lately, increasing at a 1.8% annual rate in the third quarter. Consumer spending on goods rose at a respectable 3.1% rate, while service spending growth con nues to be lackluster, expanding at only a 1.1% rate last quarter. Consumer spending on services accounts for 45% of GDP, and the persistent weakness in this category is a major reason why the overall contour of the expansion has been disappoin ng. Overall real business investment spending rose at a solid 5.5% annual rate last quarter. Business spending on equipment rose at a 7.2% rate. Spending on industrial equipment con nues to grow nicely, while business tech spending remains a weak link and is basically flat on a year-ago basis. Business construc on spending was up at a 3.7% rate, while outlays for intellectual property products rose 4.2%. Inventory investment slowed to a $63 billion annual pace, subtrac ng 0.6 percentage point from GDP growth last quarter. The recovery in the housing market has been uneven in recent months. Home sales generally have tended to dri higher, although surveys of builders and realtors have indicated only hal ng growth in prospec ve demand. Housing starts and permits have dri ed sideways in recent months, consistent with the modest 1.9% annual rate of increase in real residen al investment in the third quarter. Real government spending increased at a 4.6% rate last quarter, the fastest pace since the Recovery Act boosted spending growth in the second quarter of 2009. The gain was led by a 16.0% gain in the vola le defense spending series, which may have been related to opera ons in the Middle East. State and local government spending increased at a 1.3% rate and has increased in most quarters over the past two years, a marked shi from the 2009-2012 period when this sector presented a persistent drag to overall economic performance. Foreign trade added 1.3 percentage points to GDP growth last quarter, as gross exports increased at a solid 7.8% rate, while imports posted a rare decline, contrac ng at a 1.7% rate. The recent increase in the broad, trade-weighted dollar has yet to have a visible impact on survey-based measures of export orders, yet some slowing in export growth seems likely in coming quarters. Labor market ac vity has remained robust; over the last three months, nonfarm employment has increased by an average of 224,000 per month. Over that same period, the unemployment rate has declined another 0.3 percentage point to 5.9% in September, and the U-6 measure of labor market underu liza on has fallen by the same amount. Most measures of wage growth remain muted, though there has been a modest accelera on recently in the broad Employment Cost Index, which increased 0.7% in the third quarter and is up 2.2% over the past year. Consumer price infla on has been quite so recently, reflec ng in part a decline in energy prices. Total personal consump on expenditure (PCE) prices increased at only a 1.2% pace in the third quarter, as consumer energy prices contracted at a 4.0% rate. However, even the core PCE measure – which excludes food and energy prices – has been tame recently. The core measure increased at a 1.4% rate in the third quarter, and in September stood only 1.5% above its year-ago level. The stronger dollar should restrain import prices in the near-term, which will add downward pressure to core goods prices. Even so, steadier service prices and modestly firming wages should limit defla onary concerns. At its most recent mee ng, the FOMC decided to complete the latest asset purchase program, some mes known as QE3. Forward guidance on the expected path of interest rates has remained steady. The interest rate projec ons released at the September FOMC mee ng con nue to point to a likely beginning of interest rate normaliza on some me next year. The October FOMC mee ng did not produce new forecasts, but the statement indicated con nued approval with the recovery in the jobs market and only limited concern about downside infla on risk. Against this improved economic backdrop, the Commi ee’s first charge was to examine whether adjustments to the Treasury’s debt issuance schedule were warranted in light of current and projected funding needs. To inform this discussion, Treasury provided the Commi ee with the a ached presenta on on the fiscal outlook, receipts and outlays, financing projec ons and auc on demand. Given the improved fiscal outlook and projected surplus funding in FY 2015, the Commi ee recommended that the current funding schedule be reduced moderately, through a modest reduc on in 2 and 3year note issuance, consistent with the reduc ons that occurred in FY 2014. One considera on behind this recommenda on was to avoid a further reduc on in Bill issuance, which currently represents a historically low share of outstanding debt at 11% of total. Members noted that this recommenda on would support the orderly func on of the short-term funding markets given the increasing demand for high-quality liquid assets. The Commi ee recommended that the Treasury reconsider its funding schedule in the coming quarters, especially in light of increasing borrowing needs in 2016 and beyond. The Commi ee reiterated its recommenda on that the Treasury increase its structural cash balance, on the order of $500 billion, to mi gate opera onal risk. Given the progress made to date in extending the weighted-average maturity of outstanding Treasury debt, members recommended that the Commi ee study the projected average maturity and the pace of increase in the WAM were the Treasury to maintain current issuance pa erns. Next, the discussion turned to the intra-day market vola lity that ensued in the Treasury cash and futures markets and other financial markets on October 15, 2014. Commi ee members cited a variety of views about the factors that contributed to the market vola lity but ul mately agreed that it was a confluence of events. First, there was an apparent simultaneous pull back in risk tolerance possibly due to one or a combina on of the following reasons: geopoli cal tensions, uncertainty regarding Federal Reserve monetary policy, fears regarding the Ebola virus, the poten al effects of the significant drop in energy prices, and slowing economic growth outside the United States. Second, given changes to market regula on and to market structure, the ability and willingness of intermediaries to make markets was significantly diminished. Third, the increased vola lity and uncertainty led to an unwind of crowded leveraged trades. Fourth, members discussed the possibility of algorithmic trading exacerba ng the price changes. It was agreed that further research is warranted, as the risk of future flash price adjustments exists and needs to be be er understood. The Commi ee’s second charge was to provide an update on the trends in student loan markets over the past several years, and the poten al implica ons for Treasury financing needs. Two members provided a brief history of student lending environment, including an update to the trends discussed in the July 2012 TBAC presenta on. The a ached presenta on discussed default trends and their implica ons, factors contribu ng to growth in the direct student lending program, poten al reform proposals, and the implica ons for Treasury funding under various scenarios. Since the passing of the Student Aid and Fiscal Responsibility Act of 2010, all federal student loans are made directly by the Department of Educa on and funded by the US Treasury. The total balance of student loans is $1.3 trillion as of Q2 2014 and the federal government represents 85% of origina on volume. For a variety of reasons, loan growth is increasing and default rates are high and rising. In addi on to the current https://www.treasury.gov/press-center/press-releases/Pages/jl2686.aspx 1/2 5/5/2020 November 2014 Quarterly Refunding Report to the Secretary of Treasury CBO scoring methodology, members stated that future projected cost trends should include other factors such as market risks, demographics trends, increasing demand for higher educa on, and policy proposals to address the rising debt burden, including lowering the loan rate, extending repayment meline and forgiving loans under various circumstances. Offse ng factors could include policies to reduce the pace of origina on such as qualifica on requirements for higher educa on ins tu ons, especially for profit ins tu ons with low gradua on rates, or the poten al for improved servicing results. For illustra ve purposes only, as detailed micro data is needed to do so accurately, the members simulated a range of direct student loan balances that could result in a large increase in financing by the Treasury. Members recommended that future Commi ee analysis focus on developing an asset liability framework for funding the growing direct student lending program. Respec ully, ______________________ Dana M. Emery Chairman ______________________ Cur s Arledge Vice Chairman TBAC Recommended Financing Table Q1 2015 & TBAC Recommended Financing Table Q4 2014 https://www.treasury.gov/press-center/press-releases/Pages/jl2686.aspx 2/2
@FedFRASER