The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
5/5/2020 Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets … U.S. DEPARTMENT OF THE TREASURY Press Center Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association 2/3/2016 February 2, 2016 Le er to the Secretary Dear Mr. Secretary: Since the Commi ee last met in early November, economic ac vity decelerated no ceably but economic fundamentals remained solid. Annualized real GDP growth in the fourth quarter slowed to 0.7%, based on advanced es mates, compared to 2.0% in the third quarter 2015. The slowdown was broad-based, especially in fixed investment and government spending, while inventory accumula on and net exports subtracted from growth. Private consump on decelerated but was s ll sturdy. The job market con nued to ghten, with sizeable increases in non-farm payrolls and the unemployment rate closed the year at 5%. Renewed declines in oil prices dampened the infla on outlook, but core measures held up rela vely be er. In this context, a er seven years in the zero lower bound, the Federal Reserve increased the federal funds rate by 25 basis points in December without major mechanical difficul es. Since then, a deteriora on in market sen ment led to sizeable drawdowns in global equity markets, declines in long-term U.S. Treasury yields, increased credit risk premiums and further trade-weighted U.S. dollar apprecia on. A er its January mee ng, the Federal Reserve’s statement referred to the modera on of ac vity and the impact of global developments on the labor market and infla on, while con nuing to point to a data-dependent and ‘gradual’ hiking cycle. Private consump on growth decelerated from 3.0% to 2.2% between the third and the fourth quarters. The boost to real disposable personal income from lower oil prices appears to have had a marginally decreasing effect on consumers’ willingness to spend. Indeed, the savings rate stood at 5.4% in the fourth quarter, the highest since 2012. S ll, consump on growth is likely to remain well supported by con nued strength in durable goods outlays, one of the strongest areas of private consump on in recent quarters, and the percep on that at least part of the oil price decline will persist. In addi on, consumer confidence indicators remain near post-crisis highs, so far seemingly undented by stock market gyra ons, and household balance sheets remain well supported by steady increases in home prices. Inventory accumula on con nued to decline during the fourth quarter and business fixed investment spending decelerated to a stands ll. Nonresiden al investment was par cularly hard hit, declining by 1.8%. The structures equipment component contracted no ceably, and the equipment component declined for the first me since 2014. Weakness in the oil and gas sectors drove most of the nega ve contribu on to GDP growth from these components, but the share of these sectors in GDP has declined markedly over the past couple of years. Moreover, the non-linear cost curve structure of US oil producers implies that renewed oil price declines are likely to have less of an impact on energy capex and overall growth going forward. Outside the energy sector, most surveys of business execu ves indicate that capital spending will increase modestly in 2016. Housing sector indicators have mostly remained on the strong side. Measures of house prices reached new post-crisis highs, increasing at annual rates between 5-6% during most of the fourth quarter. Home sales have been solid---exis ng home sales bounced back in December a er a slump precipitated by changes in mortgage rules, while pending home sales rose slightly to cap a year of solid growth. On the disappoin ng side, housing starts and permits declined in December, impacted by weather-related factors and vola le segments of the market, while homebuilders’ sen ment declined slightly. Looking forward, momentum in housing should be supported by favorable demographic trends, low mortgage rates, and a ghtening labor market. Overall government spending decelerated during the fourth quarter, contribu ng only 0.1 percentage point from GDP growth. Although federal government outlays increased, these were par ally offset by declines in state and local government spending. However, in 2016, government spending is likely to increase and contribute more meaningfully to growth. This follows an agreement between Congress and White House to give a moderate boost to federal spending during the next two years and the suspension of the debt ceiling through March 2017. The resump on of the apprecia on of the U.S. dollar over the past few months has hurt net exports. In the fourth quarter, exports of goods and services declined by 2.5%, while imports increased by 1.1%. As a result, net trade deducted nearly half of a percentage point from GDP growth. These dynamics are reflected in a no ceable weakening of the manufacturing sector, with overall industrial produc on declining sharply in the fourth quarter. The strengthening of the U.S. dollar accounts for some of this decline, but it is also a ributable to a weakening of external demand arising from concerns around China’s structural decelera on and its impact on the rest of the world, especially in other Asian economies and emerging markets at large. Labor market indicators have remained strong. Nonfarm payrolls reached 292,000 in December, greatly surpassing expecta ons and bringing the quarterly sum to its highest level since the fourth quarter of 2014. Gains were widespread across industries, and especially strong in construc on and services. Tradi onal and broader measures of unemployment that include marginally a ached plus part- me workers reached post-crisis lows during the fourth quarter, even as the par cipa on rate edged up. Labor compensa on indicators, however, con nue to show only tepid gains---with posi ve but moderate yearly changes in recent prints for average hourly earnings and the employment cost index. In turn, infla on pressures have remained mostly subdued. Renewed declines in energy prices have kept headline infla on measures below 0.5%, but core measures have held up rela vely be er. The ex-food and energy core personal consump on expenditure deflator printed 1.4% (yoy) in the fourth quarter, while the core consumer price index rose to 2.1% (yoy) in December. Infla on expecta ons have declined recently, as signaled by both market and survey measures. However, moderate infla on pressures are likely to emerge as the impact from recent declines in energy and import prices fades, and as labor markets con nue to ghten. In recent communica ons, the FOMC indicated its expecta on for infla on to increase toward its 2% objec ve over the medium term. The FOMC has also emphasized that economic condi ons are likely to warrant only “gradual” increases in the target federal funds rate. In its January statement, it also alluded to the implica ons of global and financial developments on the balance of risks to the outlook. Markets interpreted this reference as a cau ous stance in face of the recent ghtening of financial condi ons---stemming mostly from increased global financial vola lity---and are only pricing 1-2 more hikes this year. However, some market par cipants think that unless economic ac vity or infla on data deteriorate significantly, or global risk aversion intensifies considerably more, the FOMC could resume hiking in March. Against this economic backdrop, the Commi ee reviewed Treasury’s February 2016 Quarterly Refunding Presenta on to the TBAC. Treasury believes it prudent to increase the level of Treasury bills outstanding over the coming quarters. Given demand for high quality liquid collateral by market par cipants, the Commi ee agreed that Treasury bill issuance should increase, and that Treasury should con nue to study the poten al addi on of two month Treasury bills. Demand for Treasury bills remains strong. If the Federal Reserve con nues to reinvest the SOMA por olio in FY2016 and coupon https://www.treasury.gov/press-center/press-releases/Pages/jl0337.aspx 1/2 5/5/2020 Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets … sizes remain at current levels, OMB is forecas ng that Treasury will be overfunded by $118 billion. However, if the Federal Reserve allows the Treasury securi es in the SOMA por olio to mature, $675 billion maturing in the next three fiscal years, Treasury’s borrowing need would increase significantly. The Commi ee’s next charge was to discuss poten al adjustments to the auc on calendar. The Commi ee con nued its recommenda on from the November 2014 mee ng that Treasury increase its Treasury bill issuance in order to reduce interest expense, to enhance short-term market func on, and to increase Treasury’s opera onal cash balance. Treasury bill demand is expected to increase given demand for high- quality liquid collateral given money market and other regulatory changes. However, if Treasury were to significantly increase in Treasury bill issuance, it would likely need to reduce nominal coupon and TIPS issuance over the coming quarters. The Commi ee was tasked with recommending a framework to aid it in determining where to reduce issuance sizes across these securi es and how best to communicate these decisions to the market. A er a robust discussion, the Commi ee recommends that Treasury consider a gradual reduc on in coupon and TIPS issuance size, on the order of $1 billion per auc on per month, focused on maturi es of 5 years and longer. The Commi ee recommends that Treasury evaluate whether further adjustments are necessary at future refunding mee ngs. In addi on, there was a robust discussion regarding the cost effec veness of TIPS issuance and some suggested TIPS auc on sizes could be reduced more than nominal issues. Regardless, there was broad agreement that Treasury remain commi ed to TIPS issuance and that any adjustment to issuance size be gradual and flexible in light of uncertain Treasury funding needs. The Commi ee’s next charge was to consider whether greater public availability of data on transac ons in the secondary market for Treasury securi es would be beneficial to market liquidity. This ques on is consistent with the outstanding RFI that was released by Treasury on January 19th. The Commi ee agreed that the official sector should have broad and detailed access to transac on data. There was considerable discussion and debate about how detailed publically available data should be and how quickly those data should be made available. Several members commented that data transparency is just one component that is necessary to promote Treasury market liquidity. The Commi ee recommended that any decisions with regard to public dissemina on of Treasury transac on data be informed by a full considera on of the public comments to the RFI. Respec ully, _______________________________ Dana M. Emery Chairman ________________________________ Cur s Y. Arledge Vice Chairman TBAC Recommended Financing Table Q1 2016 and TBAC Recommended Financing Table Q2 2016 https://www.treasury.gov/press-center/press-releases/Pages/jl0337.aspx 2/2
@FedFRASER