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Rick Rieder Blackrock, Inc. April 17, 2019 Rick Rieder, CIO of Global Fixed Income NY Federal Reserve Bank, IACFM Meeting

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Rick Rieder Blackrock, Inc. April 17, 2019 Rick Rieder, CIO of Global Fixed Income NY Federal Reserve Bank, IACFM Meeting Rick Rieder BlackRock, Inc. April 17, 2019 Rick Rieder, CIO of Global Fixed Income NY Federal Reserve Bank, IACFM Meeting April 17, 2019 What is your outlook for domestic economic growth and monetary policy and how has it evolved over recent months? What are the principal risks to your growth outlook? Are financial markets appropriately reflecting this outlook and any risks around it? PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION I. What is your outlook for domestic economic growth and monetary policy and how has it evolved over recent months? Structurally, we are at the most stable point of US Economic growth in history; cyclically, we are experiencing a tangible moderation back towards potential… Structurally, we are seeing unprecedented stability in domestic inflation and growth today Against a mandate of price stability, inflation Why? The evolution of the US economy towards services and away from goods has significantly reduced and growth volatility are at all-time lows… the risk of the manufacturing-oriented boom-bust cycles – creating inherently more stable growth 4.0% The volatility of Core GDP Dollars: Services vs Goods Contribution to US GDP (% of GDP) Inflation and Real GDP 16,000 30 3.5% have been hovering near Services Goods Manufacturing all-time lows for years 14,000 Finance, insurance, and real estate 3.0% 25 Professional and business services 2.5% 12,000 Educational services, health care, and social assistance 2.0% 10,000 20 1.5% 8,000 1.0% $ bn 15 6,000 % of GDP 0.5% 10 0.0% 4,000 2,000 5 Rolling 5Y Volatility of Core Inflation 0 0 Rolling 5Y Volatility of Real GDP 1950 1980 2000 2010 2017 The volatility of services growth has The US stands out in the services vs. goods And it is the goods sector that is more elastic and cyclical persistently been lower than that of goods composition – meaning, domestic monetary policy can be less aggressive GDP Growth: 5Y Rolling Volatility Services Consumption vs. Prices 12% Goods Consumption vs. Prices 12% 7% Share of GDP Goods Services 90% 10% 10% 6% Goods Services 8% 80% 8% 5% 6% 70% 4% 4% 60% 6% 2% 3% 50% 4% 0% 40% 2% 5Y 5Y Rolling Volatility Real YoY Real YoY Change Real YoY Real YoY Change -2% 30% 2% 1% -4% 20% 0% 10% 0% -6% -8% -1% 0% US Euro Brazil Japan Russia India China 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 1952 -5% 0% 5% 10% 15% 0% 5% 10% area Sources: BEA, Bloomberg, OECD Price YoY Change Price YoY Change PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 2 The core of this evolution lies in two structural underpinnings: 1) the historic Technological evolution impacting growth and inflation in ways never before seen in history, and 2) the Demographic evolution that is resulting in less demand – especially for goods – and hence lower potential growth and inflation… The historic influence of technology/ intangibles is a key structural driver of the stable growth in the US Investment in R&D and technological capabilities is resulting in divergent growth trends in the developed world, as the US maintains a better growth outlook than its DM peers… but the disinflationary impact on labor and consumer prices, and the resulting impact on monetary policy is equally important…1 Intangible & Tangible Investment in the US Intangible & Tangible Investment in Europe Is there a more descriptive answer for growth and growth/inflation potential, and consequently monetary policy, than this graph below? 1 Intangible & Tangible Investment as % of GDP More Tangible More Tangible Intangible Intangible As a % of capital budgets, US corporate allocations to labor Given the massive deflationary forces of most tech spending, Technology has radically changed investment and inflation, peaked in the 1940s, fixed asset investment peaked in the capital investment in tech/ IP, on a real basis in 1970 dollars, which were already being influenced by our second structural 80s, and tech spending continues to grow has literally gone off the charts economic growth trend: demographic curves Wages, % of Capital Outlays Wages, % of Capital Outlays 30% 4.0% Physical Capital, % of Capital Outlays (rhs) Physical Capital, % of Capital Outlays World Growth YoY Technology, % of Capital Outlays (rhs) 80% 30% Technology, % of Capital Outlays World Prices YoY 3.5% 100% 25% 78% 20-44 Population YoY Population Growth 25% 3.0% 76% % CapitalofOutlays % 80% 20% 74% 2.5% 20% 72% 60% 15% 2.0% YoY 70% 15% 1.5% 68% 40% 10% 10% 1.0% 66% % CapitalofOutlays % % CapitalofOutlays % 20% 5% 64% 0.5% 5% 62% 0% 0% 0.0% 60% 0% 1947 1957 1967 1977 1987 1997 2007 2017 1960 1975 1990 2005 2020 2035 2050 1947 1957 1967 1977 1987 1997 2007 2017 Hence, we believe traditional economic models will continue to be inefficient and poorly describe market conditions/monetary policy requirements unless married to an analysis of commerce today, which is in a quiet but distinct revolution at different speeds globally… Sources: Capitalism Without Capital, Federal Reserve, Haver, IMF PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 3 The demographic dynamic is another incredibly influential driver of growth and inflation globally – and there is some dispersion across regions, which helps us understand why the US can continue to see lower but solid economic growth while other regions face more onerous challenges… Demographics are a key structural driver of demand – the next 60 years look much different than the last 60 years While the US faces its own aging issues, on a relative basis it has a much brighter medium-term potential outlook than the rest of the DM world from a demographic perspective, which can allow persistent hiring (and a lower NAIRU than seen in history)… 25% 4% 15% 2.5% 15% 4% 40% 4% 2.0% 20% 3% 30% 3% 1.5% 12% 3% 10% 15% 2% 1.0% 20% 2% 9% 2% 10% 1% 0.5% 5% 10% 1% 5% 0% 0.0% 6% 1% -0.5% 0% 0% 0% -1% 0% -1.0% 3% 0% -10% -1% -5% -2% -1.5% -10% -3% -5% -2.0% 0% -1% -20% -2% 1960 1975 1990 2005 2020 2035 2050 1960 1975 1990 2005 2020 2035 2050 1960 1975 1990 2005 2020 2035 2050 1960 1975 1990 2005 2020 2035 2050 Japan Nominal GDP 20-44 Population YoY German Nominal GDP 20-44 Population YoY US Nominal GDP 20-44 Population YoY China Nominal GDP 20-44 Population YoY Demographics help us understand future cash flows, which involve problems that can be complicated when compared to liabilities… 450 400 350 300 250 200 150 Total Total / Debt GDP (%) 100 50 0 Sources: Census, Bloomberg, IMF PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 4 Today in the US, domestic growth looks to be at or above potential; taken in the context of the demographic and technological trends, we could see some continued wage (and real wage) growth but there is good reason to believe this is as good as it gets with inflation Cyclically, we see the US economy experiencing late-cycle dynamics with respect to wages; though, we do not expect a hard-landing… Wage (and Real Wage) growth will likely continue to follow the positive Output Gap and low Unemployment Rate, which puts pressure on corporate profits – acting as a self-regulating mechanism on growth Corporate Profit Growth, decomposed 3.0% 6.0% 4 4.5 2.0% 5.0% 5 4.0 20 1.0% 4.0% 3.5 DM Revenue Growth 0.0% 6 16 3.0% 3.0 -1.0% YoY 7 2.5 DM Margin Growth -2.0% 2.0% 12 8 2.0 -3.0% 1.0% -4.0% % GDP of 1.5 8 0.0% 9 -5.0% 1.0 YoY -6.0% -1.0% 10 0.5 4 -7.0% -2.0% 11 0.0 90 92 95 97 0 2 5 7 10 12 15 17 20 0 Corporate profits after tax as % of GDP (inverted axis,ls) -4 Output Gap % GDP AHE Nonsupervisory Average hourly earnings of production & non-supervisory, -8 AHE Real YoY total private (24 month lead, rs) 2012 2013 2014 2015 2016 2017 2018 2019 This is because the wage-price link has structurally broken down… this link historically injected volatility into the system: companies raised prices to protect eroding margins from wage inflation; today, technology and demographics weigh on prices, meaning companies struggle to maintain margins in a rising wage environment – thereby acting as a natural brake on the economy Decomposing margins between productivity, Today, companies can’t raise prices to maintain margins… price- So, it’s not surprising to us that inflation price inflation, and wage growth shows wages as wage correlation has weakened substantially the past 10y, expectations touched all-time lows last week the swing factor the last few years meaning wage growth can persist without being inflationary 10% Corporate Profit Margin Contributions, DM 1965-1979 1980-2007 2008-2018 5.0% 3 9% 4.5% 8% 4.0% 2 3.5% 7% 3.0% 1 6% 2.5% 5% 2.0% 1.5% 0 4% y = 0.4982x + 3.8412 R² = 0.5758 1.0% 3% -1 y = 0.5943x + 1.7262 0.5% 2% R² = 0.6155 0.0% y = 0.1516x + 2.168 1990 1995 2000 2005 2010 2015 AHE: Production & Nonsupervisory & YoY ProductionAHE: 1% -2 R² = 0.0064 2000 2003 2006 2009 2012 2015 2018 0% UMich 5-10Y Inflation Expectations 3mma % Contribution % Contribution to 4 quarter change 0% 2% 4% 6% 8% 10% Prices Wages Productivity Core PCE Sources: BLS, BEA, Bloomberg, JP Morgan Core PCE YoY PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 5 So now the US economy is slowing from a very generous fiscal tailwind to more normal growth – the risk of an overshoot looks low given the stability in core drivers we have outlined; in fact, some of the high frequency data show U.S.
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