07/10/2018

Economist Lindsey Piegza Studies the Fed Balance Sheet and Other Trends

The Fed has been very clear in their intention to address the 800-pound gorilla, or rather $4.5 trillion balance sheet, in the room, sometime this year. But their method of achievement 

remains unclear. That is one of the issues addressed by Lindsey Piegza, Chief Economist for Stifel Fixed Income, at the 2018 AFT Spring Summit at California’s Ojai Valley Inn.

Piegza noted most assets on the Fed's balance sheet are backed by liabilities, which the Fed has no intention of reducing whether it be currency in circulation, foreign reserve deposits, or deposits held for the U.S. Treasury. “So, at most what we can expect is to draw on the size of the Federal balance sheet.” The economist suggested that would bring the debt to about $3 trillion.

The Fed, she explained, does see a sizable economic slowdown on the horizon for the U.S., predicated on how some of the key sectors of the economy respond.

Another area the economist covered is consumer spending, which continued to rise, partly due to the aftereffects of the devastating hurricanes, and partially from the anticipated increase in paychecks stemming from tax reform.

“What we also saw is that consumers were increasingly willing to spend their savings,” Piegza said. Such as filling up the family car due to lower fossil fuel energy prices. Originally the fed thought this dip in oil prices was transitory, but “we've now been benefiting from lower fuel prices for the better part of three years and consumers are increasingly reliant on this factor to supplement their household spending.”

When it comes to inflation, she described a government sending out mixed signals. “On the one hand the Fed is really doubling down on their expectations for inflation to rise back to that two percent target, but on the other hand, what are they doing? They're setting the bar pretty high.” Piegza suggested if inflation fails to move up this year, it sort of ties the government’s hands in terms of monetary policy.

Piegza also displayed some worrying numbers, “This chart here just keeps me up at night and I want it to keep you up at night too.” She referred to a debt-to-GDP level of 77%, the highest level of debt relative to size of the economy since the 1950s. A study by the World Bank found that if the debt-to-GDP ratio exceeds 77% for an extended period, it slows economic growth.

She also discussed job growth. “It's all about jobs, job creation and Americans getting back to work. As the labor market continued to strengthen job creation is solid.” However, she cautioned job creation is losing momentum.

In addition, Piegza focused on business investment; and some wild cards such as crude prices on the rise, regulatory reform gaining momentum, and the shift of technology from a labor force to automation.