Economics Group Special Commentary John E. Silvia, Chief Economist john.silvia@wellsfargo.com (704) 410-3275 Azhar Iqbal, Econometrician azhar.iqbal@wellsfargo.com (704) 410-3270 Michael Pugliese, Economic Analyst michael.d.pugliese@wellsfargo.com (704) 410-3156 Persistent Sightings of Low-Inflation Zombies A Threat to Market Pricing? Executive Summary Is there a better way to estimate the near-term path of the federal funds target rate? We believe there is. By employing probabilities of inflationary and disinflationary pressures, along with a measure of the state of the labor market (labor market index), we attempt to estimate the path of the fed funds rate. Among financial market participants, the general consensus is that the Federal Open Market Committee (FOMC) may start raising its target for the fed funds rate in the near future. In fact, in September a large number of analysts (55 out of 114 forecasters) in the Bloomberg survey predicted a rate hike for the Sept. 16-17, 2015, FOMC meeting. However, the FOMC decided to keep the fed funds rate target unchanged at the 0-0.25 percent range. Although the unemployment rate is close to the full employment level, inflation is well below the FOMC s target rate of 2 percent. In addition, the FOMC has stated that the near-term inflation outlook is lower than the inflation target rate (basically, a fear of near-term disinflation), and this is one reason, among others, the fed funds rate remained unchanged. Our econometric results for the complete sample period of 1975-2015:9 (this notation represents 1975 to Sept. 2015) suggest that the labor market index and the near-term probability of inflationary pressure are statistically useful to explain movements in the fed fund rate. Over this same period, however, the probability of disinflationary pressure is not statistically associated with the fed funds rate. Does that mean that the Fed s fear of low-inflation is not real? Not so fast! For the 1990-2015:9 period, the labor market index and disinflationary probability are statistically significant in relation to changes in the fed funds rate. This indicates that in the post- 1990 era, the Fed worries include disinflation and the state of the labor market. One major reason for these low-inflation worries is that there are seven out of eight episodes of low-inflation in the post-1990 era, with the most noticeable low-inflation episodes occurring from 1997:4-1999:11 (over two years) and 2012:5-present (over three years). Therefore, disinflation (or disinflationary pressure), not inflationary pressure, best explains fed funds rates movements from the 1990s forward. The low-inflation fear gets worse for the post-2000s period, as this period contains five out of eight low-inflation episodes. Furthermore, the inflation rate has been below 2 percent since May 2012 and it is the longest low-inflation episode (longest duration of below 2 percent inflation rate) for the entire 1975-2015:9 period. In addition, the near term inflation outlook is also disinflationary as, based on September 2015 data, there is a 60 percent chance that the inflation rate would stay below 1.5 percent during the next six months. This indicates that the possibility of near-term low-inflation may affect the path of interest rate decisions in the near future. Unfortunately, the low-inflation zombie is real. We utilize probabilities of inflationary pressure and disinflationary pressure, along with a measure of the state of the labor market (labor market index), to estimate the fed funds rate. This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
The Dual Mandate of the FOMC The FOMC s dual mandate of price stability and maximum employment would dictate that the FOMC utilize the inflation outlook (or expectations of future inflation) and measures of full employment (along with other factors) to set U.S. monetary policy, in particular a path for the fed funds rate along the lines illustrated in the dot plot diagram published by the FOMC (Figure 1). Monetary policy rules, or what are now commonly referred to as Taylor rules, have become popular ways to conceptualize monetary policy decision making and evaluate the appropriate tenor of monetary policy against a consistent set of benchmarks. The Taylor rule suggests that the fed funds rate depends on inflation expectations and the output gap, see Taylor (1993) for more detail. 1 A very useful modification of the Taylor rule is suggested by Clarida at el. (1999) by including a lag of fed funds rates in the original equation. 2 This modification suggests that future fed funds rates depend on the current fed funds rate, and is important because since December 2008 the fed funds rate has been in the 0-0.25 percent range, and the FOMC did not lower the rate further because of the perceived zero nominal interest rate lower bound for policy. Therefore, in addition to inflation expectations and the output (or unemployment) gap, the current level of the fed funds rate is an important determinant of the future fed funds rates. We follow a modified version of the Taylor rule in this report to estimate the near-term path of the fed funds rate. Figure 2 Figure 1 5. 4.5% 4. 3.5% 3. Appropriate Pace of Policy Firming Target Federal Funds Rate at Year-End September 2015 Median Response June 2015 Median Response December 2014 Median Response Futures Market 5. 4.5% 4. 3.5% 3. 1 8% PCE Deflator vs. Federal Funds Rate Year-over-Year Percent Change, Percent 1 8% 2.5% 2. 2.5% 2. 4% 4% 1.5% % 1.5% % 2% 2% 0.5% 0. -0.5% 0.5% 0. PCE Deflator: Sep @ 0.2% -0.5% Fed Funds Target Rate: Sep @ 0.25% 2015 2016 2017 2018 Longer Run -2% -2% 90 92 94 96 98 00 02 04 06 08 10 12 14 Unlike some traditional methods, our approach to estimate the fed funds rate is forward looking because it includes a sixmonth out probability of the inflation outlook. Source: U.S. Department of Commerce, Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC A Forward Looking Method to Estimate the Fed Funds Rate One issue with traditional methods to estimate the fed funds rate, such as the Taylor rule, is that these methods are backward looking in the sense that these methods utilize actual inflation rates instead of the future inflation outlook. Thereby, these methods may put limits on their usefulness when estimating the future path of the fed funds rate. Our approach to estimate the fed funds rate, on the other hand, is forward looking because it includes a six-month out probability of the inflation outlook. Therefore, our approach may be more beneficial than some traditional methods for decision makers. We developed an ordered probit framework which predicts six-month out probabilities of inflationary pressure, disinflationary pressure and stable prices. 3 Furthermore, we showed that our method predicted all periods of inflationary pressure and disinflationary pressure successfully in the out-of-sample analysis for the 1983-2015 time period. Using information from the FOMC s statements, we decomposed the PCE deflator growth rates into periods of inflationary pressure, 1 Taylor, John B. (1993). Discretion versus policy rules in practice. Carnegie-Rochester Conference series on Public Policy, 39 (1993), pages 195-214. 2 For more detail see, Clarida, R., Gali, J., and Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, Vol XXXVII (December), pp 1661-1707. 3 Silvia, John and Iqbal, Azhar. (2015). An Ordered Probit Approach to Predicting the Probability of Inflation/Deflation. Business Economics, Vol 50, Issue 1, January 2015. 2
disinflationary pressure and stable prices. For example, the FOMC provides a long-run target of 2 percent as a benchmark for its stable inflation goal. Furthermore, the FOMC has stated that they may tolerate half a percentage point above the long-run inflation target of 2 percent (for more detail, see the FOMC s statement from the July 31, 2013, meeting). That is, an inflation rate higher than 2.5 percent would bring a shift upward in inflation expectations and may influence the FOMC s decisions. We assumed a similar downward spread, a half percentage point below 2 percent, may signal a disinflationary (or deflationary) set of concerns. Therefore, a PCE deflator rate between 1.5 percent and 2.5 percent may be seen as stable prices, above 2.5 percent as inflationary and below 1.5 percent as disinflationary. In addition, we provided sixmonth out probabilities of inflationary pressure, deflationary (disinflationary) pressure and stable prices. Given the historical indications of our model, the fact that probabilities capture the near-term inflation outlook, and in particular, whether the pressure is inflationary or deflationary, these probabilities are a useful measure of inflation expectations. Probabilities of inflationary/deflationary pressure are useful relative to simple, point inflation rate forecasts. Traditional forecasting models predict inflation rates for a certain period ahead; for instance, the FOMC provides a near-term inflation forecast. One issue with the traditional methods, such as the ordinary least square (OLS), is that they estimate the average relationship between, for example, inflation and a variable of interest. Moreover, the average inflation rate since 1990 is around 2 percent, which may suggest the Fed should not worry about low inflation. That would be incorrect. Furthermore, when setting the target rate, the FOMC pays more attention to the inflation outlook, in particular whether it is inflationary pressure (consistently higher than the 2 percent target) or disinflationary (persistently lower than 2 percent, like the present situation). Therefore, estimating periods of inflationary and disinflationary pressure would be more beneficial in setting monetary policy than just the average point inflation rate forecast. The six-month out probabilities of inflationary pressure, disinflationary pressure and stable prices are plotted in Figure 3, where the shaded bars above zero indicate periods of inflationary pressure, and the shaded bars below zero indicate periods of disinflationary pressure. One important observation is that the disinflation probabilities are consistently higher than the other two scenarios in the near-term, which is an indication that low-inflation risk is greater in the near future. Based on the September 2015 data, there is a 60 percent chance of disinflation during the next six-months. This confirms the Fed s fear of low-inflation in the short-term. The charts for the inflationary pressure and the fed funds rate (Figure 4) and disinflationary pressure and the fed funds rate (Figure 5) show that the probabilities for the near-term inflation outlook tend to mirror the fed funds movements over time. Figure 4 Figure 3 0.8 0.6 The 6-Months Ahead Probability of Price Scenarios in the United States 0.8 0.6 1.2 6-Months Ahead Probability of Inflationary Pressure vs. Federal Funds Target Rate Probability of Inflationary Pressure (PCE > 2.5%) (Left Axis) Federal Funds Target Rate (Right Axis) 18% 15% Based on the September 2015 data, there is a 60 percent chance of disinflation during the next six months. 0.4 0.4 0.8 12% 0.2 0.2 0.6 9% -0.2-0.2 0.4-0.4-0.4-0.6-0.6 0.2 3% Probability of Deflationary Pressure (PCE < 1.5%) -0.8 Probability of Stable Prices (1.5% PCE 2.5%) -0.8 Probability of Inflationary Pressure (PCE > 2.5%) - - 83 87 91 95 99 03 07 11 15 83 87 91 95 99 03 07 11 15 Source: Federal Reserve Board and Wells Fargo Securities, LLC The unemployment rate is perhaps the most widely utilized measure of the labor market. In our opinion, instead of using a single variable, like the unemployment rate, it is more informative to 3
Using a dynamic factor modeling approach, we constructed a labor market index from six key labor market variables. construct an index based on several indicators to analyze the overall health of the labor market. For example, one common criticism of the unemployment rate is its inability to account for potential decreases in the labor force participation rate among different labor cohorts. In addition, different segments of the labor market may perform differently during a particular phase of the business cycle. For example, average weekly hours worked suggests a stronger recovery compared to historical standards. On the other hand, the labor force participation rate indicates a weaker recovery relative to the past seven recoveries. Therefore, since a single indicator does not fully represent the health of the labor market, we suggest a comprehensive index to measure labor market performance. Using a dynamic factor modeling (DFM) approach, we constructed a labor market index. 4 The index utilizes information from six key labor market variables, including the unemployment rate, the labor force participation rate, average hourly earnings and initial jobless claims, among other variables. An index value above zero is an indication of an improving labor market and a value below zero suggests weakness in the labor market relative to its trend. In addition, the index goes back to January 1965, and gives us an opportunity to compare the performance of the labor market during the recent recession/recovery period to previous periods. One noticeable observation from the recent recession/recovery is the lowest value of the index was -2.64, which occurred during the Great Recession (March 2009). This is an indication of the severity of the Great Recession. Figure 5 Figure 6 6-Months Ahead Probability of Deflationary Pressure vs. Federal Funds Target Rate Probability of Deflationary Pressure (PCE < 1.5%) (Left Axis) Federal Funds Target Rate (Right Axis) 15% 2.0 1.5 The Labor Market Index 2.0 1.5 0.8 12% 0.5 0.5 0.6 9% -0.5-0.5 0.4 - - -1.5-1.5 0.2 3% -2.0-2.0 83 87 91 95 99 03 07 11 15-2.5 LM Index: September @ 0.14-3.0 65 69 73 77 81 85 89 93 97 01 05 09 13-2.5-3.0 Source: Federal Reserve Board and Wells Fargo Securities, LLC Estimating the Fed Funds Rate Using Inflation Probabilities and LMI Before we discuss the near-term outlook for the fed funds rate, we first analyze the historical performance of our proposed rule to estimate the fed funds rate. We estimate the following equation (1): FFR t = 0 + 1 LMI + 2 ProbInf + 3 ProbDef + 4 FFR t 1 + t (1) Following Clarida at al. (1999) notation, we include a lag of fed funds rates (FFR t-1) in the test equation. The LMI is our labor market index, ProbInf indicates the probability of inflationary pressure, and ProbDef represents the probably of disinflationary pressure. We did not include probabilities of stable prices in the model, because all three probabilities would be equal to one and therefore the model cannot be estimated. 5 We exclude stable prices so inflationary and disinflationary pressure coefficients are relative to stable prices (in other words, relative to the FOMC s target of 2 percent). 4 For more detail about the labor market index see our report, Measuring the State of the U.S. Labor Market: A New Index, published on October 28, 2013. The report is available upon request. 5 For more detail see, Silvia, J., Iqbal, A., Bullard, S., Watt, S., and Swankoski, K. (2014). Economic and Business Forecasting: Analyzing and Interpreting Econometric Results. Wily 2014. 4
We estimate equation 1 using a monthly dataset for the 1975-2015:9 period. Taylor (1993) suggested fixed weights for inflation expectations (or inflation gap) and the output gap to estimate the fed funds rate. We follow a different approach which allows the data to speak for itself. That is, we estimate coefficients of the equation (α 0, α 1, α 2, α 3, α 4) and then utilize those estimated coefficients to estimate fed funds rates. We utilize estimated weights (for example, how much change in the fed funds rate occurs in response to a change in inflation expectations) instead of fixed weights (as suggested by Taylor) because economies evolve over time, and the relationship between variables as well as risk to the economic outlook also changes with the passage of time. For example, the nature of inflation risk to the economic outlook has changed significantly during the last four decades or so, i.e., the risk of higher inflation has given way to disinflation (deflationary pressure). That is, double-digit inflation rates (higher inflation or inflationary pressure) were last seen in the early 1980s and inflation rates have averaged close to 2 percent during most of the post-1990 era. However, the inflation rate has been below 2 percent since May 2012 (the longest period during which there was below 2 percent inflation rate in our study of the 1975-2015 period) and it poses a risk of disinflationary pressure. Therefore, inflation expectations weights should be estimated using the data and that would capture the more recent nature of the risk to inflation expectations. That also reinforces our view to not utilize fixed weights, as fixed weights would be unable to capture the evolving nature of risk to the inflation/economic outlook. Furthermore, some analysts have labeled the past three recoveries as jobless. The FOMC s first rate hike was well after the official ending dates of the previous two recoveries and, as of this report s publication, there has not been a rate hike since June 2006. That is a clear indication that a fixed weight approach to estimating the fed funds rate is not efficient (we provide further statistical evidence in the latter part of this report). The estimated and actual fed funds rates are plotted in Figure 7 for the 1990-2015:9 period. Figure 7 illustrates two key points. First, the estimated fed funds rate movements are consistent with the actual fed funds rate. That is, the estimated fed funds rate captures all the turning points (rate hikes and reductions) in the actual fed funds rate during the sample period. Second, the current estimated level of the fed funds rate is 0.23 percent (as of September 2015 data). One major reason for the lower estimated fed funds rate is the probability of deflationary pressure has been persistently higher than the other two price scenarios in recent years. Furthermore, based on September 2015 data, there is a 60 percent chance that disinflationary pressure would remain during the next six months. Therefore, the recent higher disinflationary pressure probability trend may be one reason the FOMC has repeatedly lowered its path for the fed funds rate. The estimated fed funds rate movements are consistent with the actual fed funds rate. 7% Figure 7 Estimated and Actual Fed Funds Rates Estimated Fed Funds Rate Actual Fed Funds Rate 7% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% -1% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15-1% Source: Federal Reserve Board and Wells Fargo Securities, LLC 5
For the complete sample period of 1975-2015:9, LMI and ProbInf (inflationary pressure probability) are statistically significant to explain movements in the fed funds rate. Putting Statistics to Work: Is the Fed s Low-Inflation Fear Real? In standard textbook models, during inflationary pressure eras, the FOMC may raise interest rates to combat higher inflation. Similarly, the FOMC may reduce the fed funds rate to battle lowinflation. Basically, two different set of inflation expectations (inflationary vs. deflationary) would require two different rate decisions (rate hike vs. reduction). With this discussion, we want to shed light on two important points. First, neither the inflation rate forecast nor fixed weights for inflation expectations are useful in the rate setting decision as different inflation expectations (inflationary vs. deflationary) are associated with different interest rate decisions (rate hike vs. reduction) from the FOMC. Second, to guide the FOMC, can we quantify the relationship between the fed funds rates and different inflation expectations? To answer that question and to further investigate the role of inflation expectations in the interest rate setting decisions, we run regression analyses using a monthly dataset for the 1975-2015:9 periods as well as for several sub-samples during this period. We estimate equation (1), and the results are reported in the table below. For the complete sample period of 1975-2015:9, LMI and ProbInf (inflationary pressure probability) are statistically significant to explain movements in the fed funds rate. Furthermore, for the complete sample period, ProbDef (disinflationary pressure probability) is not statistically associated with the fed funds rate. Because near term inflation expectations could be either inflationary or deflationary and cannot be both, thereby only one of the coefficients, either ProbInf or ProbDef, will be statistically significant in a regression analysis. A statistically significant coefficient may indicate that a particular inflation expectations scenario (inflationary pressure for the complete sample, for example) is helpful to the FOMC in its fed funds rates setting decision. If both coefficients are statistically insignificant, then inflation expectations stay around stable prices zone, on average, and factors other than inflation expectations may play a significant role in the fed funds rate movements. A positive sign for the LMI and ProbInf is consistent with the notion that to stimulate the labor market (and economy) the FOMC would reduce the funds rate and, on the other hand, to combat inflationary pressure, the FOMC would raise interest rates. A negative sign is expected for the ProbDef as the FOMC would reduce interest rates (or follow an expansionary monetary policy) during deflationary pressure periods. For the 1975-2015:9 period, on average, the Fed worries about the labor market and inflationary expectations (as both are statistically significant) and may have considered these two factors in interest rates setting decisions. That makes sense (at least to us) as the average unemployment rate for the 1975-2015:9 period is 6.5 percent (higher than the full employment level, which is around 5-5.5 percent) and the average inflation rate is 3.4 percent (higher than the current FOMC target of 2 percent inflation rate) for the same period. In addition, the average fed funds rate is 5.3 percent for the same period. Table 1 Sample Period Intercept Independent (Right-hand-side) Variables Labor Market Index Probability of Inflationary Pressure Probability of Deflationary Pressure 1975:1-2015:9-0.153 0.16* 0.524** 0.224 1990:1-2015:9 0.146*** 0.165* -24-0.286*** 2000:1-2015:9 0.269*** 0.157* -0.179-0.484*** 1990:1-1999:12-0.324 0.285* 0.384 0.358 1990:1-2007:11-0.104 0.259* 0.245 0.368 1975:1-1989:12-0.164 0.132* 0.556* 0.193 Source: Wells Fargo Securities, LLC 6
The Post-1990 Era and the Seven Low-Inflation Zombies As mentioned earlier, economies and economic relationships between variables evolve over time and past average relationships may change. That is also true for the U.S. economy, as the average fed funds rate for the 1990-2015:9 period is 3.2 percent, unemployment rate is 6.1 percent and the inflation rate is 2.1 percent. These averages are smaller for the 1990-present era compared to those of the 1975-2015:9 period. This also raises the possibility that the post-1990 era may not be consistent with the pre-1990s as well as with the complete sample period of 1975-2015:9. In other words, should we utilize fixed weights as suggested by the Taylor rule to capture fed funds rates movements? The answer, in our opinion, is no, because the post 1990 era may be different than the pre-1990s period. To test this hypothesis, we ran several regressions for sub-samples. For the 1990-2015:9 period, from Table 1, LMI and ProbDef are statistically significant to explain changes in the fed funds rate. The ProbInf is not statistically significant for this sample period. Basically, in the post 1990s era, the Fed worries include disinflationary pressure and the labor market state and less so inflationary pressure. The average inflation rate for the 1990-2015:9 period is 2.1 percent, which is close to the Fed s target of 2 percent. Why then is the Fed worried about low inflation? There were seven out of eight episodes of low-inflation in the post-1990 era, and the most significant episodes are 1997:4-1999:11 and 2012:5-present. A low-inflation episode is defined as six consecutive months of below 2 percent inflation. 6 Thus, statistically, disinflationary pressure, and not inflationary pressure, best explains fed funds rates movements in the post-1990 period. This also confirms our hypothesis about the changing nature of the economy and the need for variable-weights of inflation expectations. Speaking of the changing nature of economies, is the post-2000 era different than the pre-2000 period? It seems that the post-2000 era is different than the pre-2000 period, as the average unemployment rate is 6.3 percent (5.8 percent for the 1990-99 era), the average fed funds rate is 2.0 percent (lower than the 1990-99 period average of 5.12 percent) and the average inflation rate is 1.9 percent, which is lower than the 1990-99 era inflation rate of 2.0 percent. We ran another regression for the post-2000 period, and the LMI and ProbDef were statistically significant, while the ProbInf was statistically insignificant. One important finding is that ProbDef has the largest coefficient (in absolute term) for this sample period compared to the other sample periods. That makes sense because the post-2000 period contains five out of eight low-inflation episodes. This indicates that the low-inflation (or deflationary pressure) zombie became strongest in the post- 2000 period. The average fed funds rate (1.97 percent) and inflation rate (1.92 percent) is reported for the post-2000 period and these averages are lowest compared to any other subsample and complete sample period. This supports the notion that the risk of low-inflation is highest in the post-2000 period compared to any other sub-sample period in our analysis. We also ran regressions for the 1990-99 period and 1990-2007:11 period and only LMI came out as statistically significant. That may indicate that damages from the Great Recession and financial crisis have boosted the risk of low-inflation, as there are three low-inflation episodes in the post- 2007:12 period (era since the beginning of the Great Recession). Furthermore, the fed funds rate has been in the 0-0.25 percent range (basically no change) since December 2008, and since it is our dependent variable, we are thereby unable to run a regression for the post-great Recession era. We also ran a regression for the 1975-1989 (the pre-1990 era), and we found that LMI and ProbInf are useful factors to explain changes in the fed funds rate in this period. Inflationary pressure was an issue for the monetary policy makers during most of that time period, as the average inflation rate for the 1975-1989 period was 5.77 percent. Back then, higher inflation, not low-inflation, most likely kept FOMC members awake at night. These different conclusions from different sub-sample periods results support the hypothesis that the changing nature of economies and impending risk to the economic outlook require time- 6 Since 2 percent inflation rate is the FOMC s target and a natural threshold for low inflation. In addition, we utilize six-month out probabilities of inflation outlook as short term inflation expectations and thereby six consecutive months of below 2 percent inflation is considered a low-inflation episode. There are seven low-inflation episodes in the post-1990 era. There is only one low-inflation episode in the 1975-1989 period. Thus, there are a total of eight low-inflation episodes in the 1975-2015:9 period. Thus, statistically, disinflation (or deflationary pressure), and not inflationary pressure, best explains fed funds rates movements in the post-1990 period. These different conclusions from different sub-samples support the hypothesis that the changing nature of economies and impending risk to the economic outlook require time-varying methods to help decision makers. 7
varying (consistent with the nature of risk) methods to help decision makers. In other words, we should not utilize fixed-weights of inflation expectations in monetary policy decision making. Conclusion: Yes, Unfortunately, the Low-Inflation Zombie Is Real We proposed a forward-looking method to estimate the path for the fed funds rates. In addition, we suggest that due to the changing nature of economies and impending risk to the economic outlook, a time-varying (consistent with the nature of risks) method would help decision makers to improve effective decision making. In other words, we should not utilize fixed-weights of inflation expectations in monetary policy decision making. 8
Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (704) 410-1801 (212) 214-5070 diane.schumaker@wellsfargo.com John E. Silvia, Ph.D. Chief Economist (704) 410-3275 john.silvia@wellsfargo.com Mark Vitner Senior Economist (704) 410-3277 mark.vitner@wellsfargo.com Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 jay.bryson@wellsfargo.com Sam Bullard Senior Economist (704) 410-3280 sam.bullard@wellsfargo.com Nick Bennenbroek Currency Strategist (212) 214-5636 nicholas.bennenbroek@wellsfargo.com Eugenio J. Alemán, Ph.D. Senior Economist (704) 410-3273 eugenio.j.aleman@wellsfargo.com Anika R. Khan Senior Economist (704) 410-3271 anika.khan@wellsfargo.com Azhar Iqbal Econometrician (704) 410-3270 azhar.iqbal@wellsfargo.com Tim Quinlan Economist (704) 410-3283 tim.quinlan@wellsfargo.com Eric Viloria, CFA Currency Strategist (212) 214-5637 eric.viloria@wellsfargo.com Sarah House Economist (704) 410-3282 sarah.house@wellsfargo.com Michael A. Brown Economist (704) 410-3278 michael.a.brown@wellsfargo.com Erik Nelson Economic Analyst (704) 410-3267 erik.f.nelson@wellsfargo.com Alex Moehring Economic Analyst (704) 410-3247 alex.v.moehring@wellsfargo.com Misa Batcheller Economic Analyst (704) 410-3060 misa.n.batcheller@wellsfargo.com Michael Pugliese Economic Analyst (704) 410-3156 michael.d.pugliese@wellsfargo.com Donna LaFleur Executive Assistant (704) 410-3279 donna.lafleur@wellsfargo.com Cyndi Burris Senior Admin. Assistant (704) 410-3272 cyndi.burris@wellsfargo.com Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. Wells Fargo Securities, LLC. and Wells Fargo Bank, N.A. are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 2015 Wells Fargo Securities, LLC. Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. For purposes of the U.K. Financial Conduct Authority s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE