Finance Committee Agenda and Packet 2017 09 18

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CAL Economic Update ■ The Federal Open Market Committee (FOMC) left the fed funds target rate unchanged at a range of 1.00%-1.25% at the July 26 meeting. The FOMC did not update their economic projections (which point to another rate hike before the end of the year) or host a press conference in conjunction with that meeting. The language of the Fed's policy statement suggested they could begin tapering the amount of their balance sheet reinvestments in September. The statement specifically said they plan to begin implementing their balance sheet normalization program "relatively soon". Though inflation is expected to remain below the Fed's target in the near-term, the FOMC expects inflation to stabilize over the medium term. We continue to believe the Fed is likely to keep policy rates unchanged through year- end, but believe policymakers are firmly committed to starting the balance sheet normalization process this fall. All else being equal, we believe the FOMC's plans to normalize the balance sheet could ultimately foster a steeper Treasury yield curve. • GDP grew by 3.0% in the second quarter, following growth of 1.2% in the first quarter. We expect economic growth to remain modest through year-end. While tax reform or fiscal stimulus may ultimately help fuel stronger economic growth, there is a high level of skepticism among market participants that the Trump administration will deliver on their legislative agenda. In addition, concerns are building about the looming debt ceiling debate. Though financial market volatility has been quite low in recent months, we expect volatility to be elevated this fall. • The Treasury yield curve flattened in August. The 2 -year Treasury yield declined two basis points to 1.33% and the 10 - year Treasury yield declined about 18 basis points to 2.12%. We believe geopolitical tensions and domestic political uncertainty weighed on the long end of the yield curve.