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Fed Watcher: A Fed Policy Rule Dashboard Summary

Core Content

This document is a summary report titled "Fed Watcher: A Fed policy rule dashboard" authored by Deutsche Bank economists and associates. It provides an analysis of the Federal Reserve's policy outlook, with a focus on the likelihood of interest rate hikes and the implications of current economic conditions on monetary policy decisions.

Main Views and Key Information

Fed Policy Outlook

• The report suggests that fedspeak has been more supportive of a December rate hike.
• Deutsche Bank's view is that a rate hike in December is expected, followed by three more in 2018 (June, September, December).

Fed Statements and Insights

• Harker indicates very little slack in the labor market, suggesting a more hawkish stance.
• Kaplan believes solid growth and strong labor market conditions will lift inflation, supporting a December hike.
• Dudley highlights that pressure on resources will drive up wages, implying a potential upward trend in inflation.
• Williams comments on the Phillips curve, stating that it has been "declared dead" more times than Mark Twain, indicating skepticism about traditional inflation models.
• Yellen notes that little new information has been provided, and the Fed may need to use unconventional policies in the future.

Fed Research Highlights

• The wage Phillips curve has weakened since 2009 at the state level, but this may be a short-lived phenomenon.
• Hurricanes had an impact on employment and earnings, reducing job growth by 200,000 to 300,000 in September, and possibly increasing wage growth due to the disruption.

Policy Rule Values (as of Q3 2017)

Note: LW stands for Laubach-Williams (2003) estimates of the natural rate of interest.

Events to Watch

• No key events are expected this week as the Fed enters a blackout period before the October 31–November 1 FOMC meeting.

Policy Impact and Market Considerations

• The Fed funds rate projections vary across different policy rules, indicating a divergence in expectations.
• The report emphasizes the importance of monitoring macroeconomic fluctuations, which can significantly affect fixed income instruments and currency exposures.
• FX risk is a key consideration for investors, especially when dealing with securities denominated in foreign currencies.
• Derivative transactions, including swaps and options, carry market, counterparty, and liquidity risks.

Legal and Disclosure Information

• The Deutsche Bank Research Department is independent of other business divisions.
• Important conflict disclosures are available on the Deutsche Bank website under the "Disclosures Lookup" and "Legal" tabs.
• Analysts may hold securities of the issuers they cover, and recommendations may differ based on different time horizons or methodologies.
• SOLAR ideas are high conviction trading recommendations for equities, typically over a two-week period.
• The report is not investment advice and does not consider individual client circumstances.

Jurisdictional Information

• United States: Distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA, and SIPC.
• Germany: Approved by Deutsche Bank AG, authorized under German Banking Law and supervised by the European Central Bank and BaFin.
• Hong Kong: Distributed by Deutsche Bank AG, Hong Kong Branch or Deutsche Securities Asia Limited.
• India: Prepared by Deutsche Equities India Pvt Ltd, registered with SEBI.
• Japan: Approved by Deutsche Securities Inc., registered as a financial instruments dealer.
• Korea: Distributed by Deutsche Securities Korea Co..
• South Africa: Distributed by Deutsche Bank AG Johannesburg, a branch of the German entity.
• Singapore: Distributed by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch.
• Qatar: Distributed by Deutsche Bank AG in the Qatar Financial Centre, regulated by the QFCRA.
• Russia: Information is not in the context of any licensed appraisal or evaluation activity in the Russian Federation.
• Saudi Arabia: Distributed by Deutsche Securities Saudi Arabia LLC, regulated by the Capital Market Authority.
• United Arab Emirates: Distributed by Deutsche Bank AG in the Dubai International Financial Centre, regulated by the DFSA.
• Australia and New Zealand: Intended only for wholesale clients as defined by local regulations.
• Australia: Retail clients must review the Product Disclosure Statement (PDS) before making investment decisions.

Final Notes

• This report is for informational purposes only and does not constitute investment advice.
• Disclosure of conflicts of interest and legal information is available on the Deutsche Bank website.
• Copyright © 2017 Deutsche Bank AG.