• After tax profits are roughly flat at $1.5tn (since 2012).
• (Net) dividends paid to other sectors is close to its historical average (as a share of profits).
• Corporate net cash flow has increased recently (from $2tn mid-2013 to $2.2tn).
• The profit measure more closely associated with S&P500 reported earnings ticked down in 3Q15, but is up by 4% since last year.

• Given recent concerns about seasonal adjustment and measurement problems, BEA has recommended looking at both GDP and GDI to infer the underlying state of the economy.
• However, all the measures (GDP, GDI and GDP Plus) are currently showing a similar picture: an annual pace of growth just above 2%, slowing down from the 3% pace of late 2014.

• GDP is running above potential.
• The good news is that GDI was revised up in Q2 (0.7% to 2.2%) and printed 3.1% in Q13 2015 and was revised up in Q2 (before revisions, GDI was running very weak -- a point which I mentioned as a concern last quarter).
• The value of goods and services purchased by US residents is growing at 2.8%.
• Fear of inventory overhang: too much ado... (details below).

• Decision to be on hold explained:
• • Almost all members agreed it was appropriate to wait for additional information to clarify whether the recent deceleration in the pace of progress in the labor market was transitory or reflected more persistent factors (note: the October report, released after the meeting, was probably enough to conclude deceleration was transitory).
  • Also, in the absence of greater confidence about the inflation outlook, it would be prudent to wait for additional information.
• How much further progress in labor market is needed?
• • Members expressed a range of views regarding the extent of further progress in labor market indicators they would need to see to judge it appropriate to raise the target range for the fed funds in December.
• How much progress toward 2 percent inflation?
• • The same bla bla that members anticipate inflation would gradually return to 2% over the medium term.
  • But minutes mentioned that most of the members were not yet sufficiently confident of that to begin increasing rates.
  • A couple of members expressed concern about the continued decline in market-based measures of inflation compensation. "Moreover, the risk was noted that downward pressures on inflation from the appreciation of the dollar could persist".
  • The October CPI report, however, has shown all the measures of core inflation rising (see http://bit.ly/USOctCPI).
• Changes to postmeeting statement:
• • FOMC changed its near-term policy path from the assessment that would be needed to determine "how long to maintain the current target range" to what would be needed to determine "whether it would be appropriate to raise the target range at its next meeting".
  • The idea was to convey the information that rates would be increased IF: (a) unanticipated shocks do not adversely affect economic outlook, and (b) incoming data support expectation labor market will continue to improve and inflation will return to 2%.
  • So the goal was to leave policy options open for December; but a couple of members worried this could be signaling too strongly that rates would be increased in December.

• The staff briefed the participants regarding the concept of an equilibrium real interest rate (r*).
• Conclusions leaned towards:
• • r* was negative in the aftermath of the 2008-09 financial crisis and is currently close to zero.
  • Equilibrium level of r* would likely remain low relative to estimates before the financial crisis (due to productivity and demographic factors).
• Policymakers made a number of observations:
• • actual levels of short-term real rate has been below r* (but not substantially below), consistently with estimates that r* is currently close to zero.
  • a number of participants expect r* to rise as the expansion continues (but probably only gradually).
  • r* will not go back to pre-crisis levels (this is why the dot for long run nominal fed funds has been falling in Fed's forecasts).
  • Lower r* imply rates will be closer to the ZLB --- and this "might increase the frequency of episodes in which policymakers would not be able to reduce the federal funds rate enough".
  • Therefore "some participants noted that it would be prudent to have additional policy tools that could be used in such situations".

• There was a lot of talk about the labor market in the aftermath of a slowdown in job gains in August and September, and the discussion centered on whether it was temporary or more persistent. Hawks and doves made the usual arguments.
• There was somewhat widespread concern with downside risks to inflation (mentioning market-based measures of inflation compensation).
• Arguments against delaying increasing rates were presented: delay could increase uncertainty in financial markets, unduly magnify the importance of the beginning of policy normalization, increasing risk of a buildup of financial imbalances, decision to delay could be interpreted as signaling lack of confidence in the US economy, could erode FOMC credibility, progress should be measured in light of the cumulative gains without placing excessive weight on month-to-month changes in incoming data.
• Arguments for delaying were also presented: downside risks to the outlook remained, concerns about loss of momentum in the economy, that inflation might fail to increase, uncertainty about whether growth was robust enough to withstand potential adverse shocks given limited ability of monetary policy to offset such shocks, concern that beginning of normalization might be associated with unwarranted tightening of financial conditions -- risk management considerations would call for caution, premature tightening might damage FOMC credibility to reach 2% inflation.
• From the size of the previous two bullets, one may infer the arguments are balanced.
• But the more important, perhaps, was that "several participants" think it would be prudent to consider options for providing additional policy accommodation if the economic outlook were to weaken and undermine progress in labor market conditions and reaching 2% inflation.

• Core CPI inflation momentum rose to 2.2% (annualized). The last two months hit 2.7% (ar).
• Core services inflation increased from 2.5% yoy in June to 2.8% yoy in October. Core goods are down 0.7% yoy.
• Sticky-price CPI (a sign of anchored expectations) is trending up.
• Is that enough to be reasonably confident inflation will move back to its 2% objective?

"The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."

• Industrial production fell 0.2% in October, largely due to energy.
• Non-energy IP rose 0.4% in the month. Core manufacturing rose 0.3%. Both were revised up in Aug/Sept.
• Core manufacturing is growing a bit above 2% -- not too far from the 1.4% annualized growth observed since 2010.
• ISM / Markit surveys and Conference Board leading indicator do not suggest upside for industry in the near term.
• Weakness in oil sector and strong dollar remain a concern.

• Preliminary Michigan Sentiment in November at 93.1, up 3.1 points from the October estimate.
• This was largely due to a stronger outlook for the domestic economy.
• The overall tone of the report was very positive (see quotes below). Current level of Sentiment is associated with real consumption growing at 3.5%.
• Historical episodes show that real consumption grows in the 2.5%-4.5% range while Sentiment is near current levels.
• 5-10y inflation expectation remained at the 2.5% level, the lowest rate ever recorded.

• "The largest gains were among households with incomes in the bottom two-thirds of the distribution"
• "Sentiment gain among households with incomes in the top third rose marginally"
• "Buying plans for large discretionary purchases improved"
• "Six-in-ten consumers expect interest rates to increase in the months ahead; that proportion has not increased in the past few months"
• "Assessments of current personal finances improved in early November"
• "For the second month, consumers anticipated an annual long term inflation rate of 2.5%, which ties the lowest rate ever recorded"
• "The decline in the near term inflation rate appears to have been due to consumers finally becoming less skeptical that gas prices will actually remain at current lows in the year ahead"
• "Consumers reported more positive economic developments in early November, primarily about gains in employment, as well as fewer negative reports about domestic stocks, the global economy and international trade"
• "The majority of consumers anticipated that good times would persist uninterrupted by any downturns over the next five years"

• October: advance retail sales rose 0.1%mom, below 0.3% market consensus; control group increased 0.2%mom vs 0.4% consensus.
• Despite being below consensus, trend growth is unchanged:
• • 12-month growth of total retail sales ex gasoline stations increased from 4.2% to 4.3%.
  • 12-month growth of the 'control group' unchanged at 3.1%.
  • Both are very close to the 4-year growth pace: a resilient consumer!
• Inventory-to-sales ratio remained stable.

• Global PMI continues ticked up in both developed and emerging countries.
• But there is a clear divergence on what the PMIs suggest:
• • Developed countries industrial production growth likely to move sideways at a low pace of growth
  • Emerging countries IP growth likely to slowdown further.