1 2 Interest Rates – from 3000 BC

Source: Business Insider 3 Yield Curve 101

❖ Fed Funds – 2.40% (2.25%-2.50%) ❖ +75 bps ❖ =3.15% 2-year note yield (2.52%) ❖ +100 bps ❖ =4.15% 10-year note yield (2.66%) ❖ +50 bps ❖ =4.40% 30-year bond yield (3.00%) ❖ Yield Curve is Flat

4 Treasury Yield Curve-2018-2019

Source: Bloomberg

5 Treasury Yield Curve 2018-2019

Source: Bloomberg

6 U.S. vs. German Yield Curves

Source: Bloomberg

7 Source: Walt Handelsman - Newsday

8 Economic Growth – 2004-2018

Source: BEA & Bloomberg

9 Economic Growth – 1947-2018

Source: BEA & Bloomberg

10 11 Key to Economy – Innovative New Jobs

12 Beneficiaries of Economic Innovation

13 Measures of Unemployment

Source: Bureau of Labor Statistics

•U-3: Total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate).

•U-6: Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

14 U.S. Unemployment Rate U-3

Source: BLS and Bloomberg

15 U.S. Unemployment Rate U-6

Source: BLS and Bloomberg

16 U.S. Non-farm Payrolls (2009-Present)

Source: BLS and Bloomberg

17 U.S. Non-farm Payrolls (1939-Present)

Source: BLS and Bloomberg

18 Weekly Initial Jobless Claims(2009-Present)

Source: DOL and Bloomberg

19 Weekly Initial Jobless Claims(1967-Present)

Source: DOL and Bloomberg

20 21 German Inflation – 1918-1923

Source: BEA & Bloomberg

22 Wages vs Inflation (PCE Core YoY) – 2007-2019

Source: BEA, BLS & Bloomberg

23 Inflation CPI (YoY) – 1914-2019

Source: BEA & Bloomberg

24 Inflation (PCE Core YoY) – 1960-2018

Source: BEA & Bloomberg

25 Average Hourly Earnings (YoY) – 2008-2019

Source: BLS & Bloomberg

26 27 Locations of the Banks

Source: The Federal Reserve

28 Fed Has a Dual Mandate ❖ Maximize Employment ❖ Prefer to grow GDP in a 2.5%-to-3.5% range ❖ 2018 ❖ Q1-2.2% /Q2-4.2% /Q3-3.4% /Q4-3.1% (f) ❖ 2019 (f) ❖ Q1-3.0% /Q2-2.6% /Q3-2.3% /Q4-2.2% ❖ Q4/Q1 Forecasts: ❖ Atlanta Fed – 1.5% ❖ NY Fed – 2.23%/1.08% ❖ Stabilize Prices ❖ Inflation is nearing target

29 What’s the Fed Doing? – Interest Rates

❖ Interest Rate Policy ❖ Began Rate Hikes in December 2015 ❖ Currently at 2.25%-2.50% Fed funds target rate ❖ Fed “expected to remain on hold in 2019 ❖ 4.4% Chance rates are higher in December 2019 ❖ 11.5% Chance rates are lower in December 2019 ❖ Normalized fed funds target of 3.00% (2.75%-3.25%) ❖ Current Estimate is 4.82% ❖ Fed-to-Taylor Spread of -232 bps ❖ Interest on Excess/Required Reserves (IOER) – 2.40%

30 What’s the Fed Doing? – Balance Sheet

❖ SOMA was $4.2 Trillion ($2.4+ Treasuries/$1.8 MBS) ❖ Reduction began in October 2017 (October 13) ❖ SOMA is $3.81 Trillion ($2.2+ Treasuries/$1.6 MBS)

Time Tsy MBS Monthly Quarterly Cum Tot Total Total Oct-Dec 17 $6 b $4 b $10 b $30 b $30 b Jan-Mar 18 $12 b $8 b $20 b $60 b $90 b Apr-Jun 18 $18 b $12 b $30 b $90 b $180 b Jul-Sep 18 $24 b $16 b $40 b $120 b $300 b From Oct 18 $30 b $20 b $50 b $150 b $450 b 2019 $30 b $20 b $50 b $150 b $1.05 t 2020 $30 b $20 b $50 b $150 b $1.65 t Source: New York Federal Reserve

31 FOMC –2019 Voters

❖ – Fed Chair ❖ Rich Clarida – Vice Chair ❖ John Williams – NY Fed President ❖ – Governor ❖ Randall Quarles – Vice Chair for Supervision ❖ -Governor

❖ Charles Evans – Chicago Fed President ❖ – City Fed President ❖ James Bullard – St. Louis Fed President ❖ Eric Rosengren – Boston Fed

32 FOMC – More Newcomers?

❖ Previously Nominated but were not Resubmitted by President Trump ❖ Marvin Goodfriend ❖ Economics Professor at Carnegie Mellon ❖ Former Director of Research at Richmond Fed ❖ Senate Hearings Were Difficult ❖ Never presented for a full Senate vote ❖ New Names ❖ Herman Cain ❖ Ran for President in 2012 ❖ Former pizza company executive ❖ Served on the Kansas City Fed’s Board from 1989-1996

❖ Nominee is not a top priority for President Trump at this time

33 Source: Clay Bennett.com

34 Economic Growth – GDPNow Forecast

Source: Atlanta Fed GDPNow Model

35 U.S. Interest Rate Forecasts - Street

February 2019

Source: Bloomberg

Now Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20 Q4 20

Fed Funds - 2.50% 2.50% 2.60% 2.70% 2.80% 2.80% 2.80% 2.80% 2.75% UB Fed Funds - 2.25% 2.25% 2.37% 2.46% 2.55% 2.54% 2.55% 2.54% 2.52% LB 3-mon Libor 2.69% 2.72% 2.81% 2.89% 2.95% 2.99% 2.99% 3.00% 2.93%

2-yr note 2.52% 2.63% 2.74% 2.81% 2.86% 2.88% 2.91% 2.90% 2.84%

10-yr note 2.66% 2.82% 2.91% 2.99% 3.03% 3.08% 3.09% 3.10% 3.08%

30-yr bond 2.99% 3.10% 3.17% 3.25% 3.29% 3.36% 3.39% 3.41% 3.38%

2s/10s 15 19 17 18 17 19 18 20 24 Spread

36 What Do Traders Think?

Fed Fund Futures – Implied (Chance of 25 bps Change)

37 38 Geopolitical ❖ The Big Three “Problems” ❖ North Korea ❖ BSC Leadership ❖ At least hobby of launching missiles has stopped ❖ China ❖ Military Expansion ❖ Investments Globally – especially in Africa ❖ Island Building in South China Sea ❖ Russia ❖ Disruptions of Foreign Elections ❖ Military Resurgence ❖ Especially Naval Power ❖ Naval Bases in Crimea 39 Political ❖ EU – Does it Hold Together ❖ Is Frexit, Grexit, or Germxit Next? ❖ Brexit Negotiations- Disaster ❖ U.S. Leadership ❖ Leadership’s Questionable Decisions ❖ U.S. Ceding Leadership Role to China ❖ TPP - Was Intended to Combat China’s Growing Economic Influence ❖ Paris Climate Accord ❖ No longer at the Table to have a Say ❖ NAFTA ❖ Are We in a New Age of Isolationism? ❖ Debate that began in the late 90’s (1890’s) 40 More Things that Interrupt My Beauty Sleep

❖ Trade Wars ❖ Tariffs = Bad ❖ Does nobody remember the Smoot-Hawley harm ❖ China - Escalating into a full blown trade war? ❖ U.S. Deficit ❖ To paraphrase Mr. Dirksen - “A trillion here and trillion there and pretty soon you are talking about some real money” ❖ $22.02 Trillion (US Debt Clock.org) ❖ $179,907 debt per taxpayer ❖ $67,020 debt per citizen ❖ U.S. Federal Budget Deficit/Surplus to GDP Ratio ❖ 1980 – 1.625% / 1990 – 3.439% / 2000 – 1.708%

❖ 2010 – 9.589% / Now – 4.168% 41 42 Disclaimers

The opinions expressed are those of the presenters and not necessarily of Robert W. Baird & Co.

Past performance is not a guarantee of future results. Robert W. Baird & Co., Inc. Member SIPC

43 Sources:

➢ Bloomberg ➢ Bank America Merrill Lynch ➢ Barclays ➢ Bloomberg Barclays Indices ➢ Bureau of Economic Analysis ➢ Bureau of Labor Statistics ➢ Business Insider ➢ CBO ➢ U.S. Census Bureau ➢ CreditSights ➢ Department of Labor ➢ ➢ Federal Reserve Bank of Atlanta – GDPNow Model ➢ Federal Reserve Bank of New York– SOMA Account Holdings ➢ SIFMA ➢ USDebtClock.org

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