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Do We Sense Some Back Pedaling?

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Federal Reserve Chair Janet Yellen spent two days this week defending and explaining the Federal Reserve’s monetary policy to members of Congress. The Q&A session elicited a short-lived rally in the financial markets. Yellen suggested the fed funds rate does not have far to go to a reach neutral stance. Even with additional rate increases over the next few years, interest rates will probably remain below levels seen in previous years. In other words, the new normal is lower! As for the balance sheet, Yellen expects it to shrink appreciably and possibly return to normal by 2022. In the end, the balance sheet will still be larger than it was pre-recession and consist mainly of Treasury securities. Taken together, these comments sent the message that the Fed plans to move very gradually in exiting the current easing strategy. This week’s economic data reinforced a slow and steady campaign.

Other Key Indicators this Week:

Inflation – It may be easier to just forget about inflation rising any time soon. This week’s PPI and CPI reports were not only below expectations, but were also lower than the previous reports. In fact, year-over-year PPI fell for the third consecutive month, and CPI dropped for the fourth month in a row. Core CPI YOY, one of the indices the Fed monitors, remained at 1.7 percent, far below the Fed’s target of two percent. Falling energy prices continue to keep a lid on inflation.  I am beginning to suspect the effect may not be as transitory as the Fed is hoping. Wholesalers remain reluctant to pass price increases to consumers. Food prices rose 0.6 percent at the wholesale level, but remained unchanged at the consumer level. Medical and shelter costs were the only sectors posing an increase.

Retail Sales – U.S. retail sales declined in June for the second month in a row. Overall sales fell 0.2 percent. Sales minus autos were also down 0.2 percent, suggesting weakness is spreading beyond the troubled auto industry. Most of the key discretionary categories posted lower or negative results. Internet sales, a category that has been increasing over time at the expense of brick and mortar stores, improved 0.4 percent, just half the gain from the prior month. Analysts are hoping this was a temporary pullback due to the early July Amazon Prime shopping day.

Manufacturing – Thank goodness for one positive report. Industrial production increased 0.4 percent in June, following a 0.1 percent higher revision in May. A boost in motor vehicle production, up 0.7 percent, brought manufacturing activity up by 0.2 percent. The mining component of the broad index jumped 1.6 percent. Utility output was unchanged, mostly due to a 1.9 percent drop in natural gas production. Capacity utilization increased slightly to 76.6 percent from 76.4 percent. Total industrial production has steadily improved from 2015, but has been showing some signs of slowing.

Strategically for Credit Unions:

The average rate on credit union checking accounts has increased one basis point since November 2015. The average CD rate is 12 basis points higher. Despite the Federal Reserve increasing the benchmark rate by 125 basis points over the past 18 months, there has been little pressure for financial institutions to raise deposit rates. Members have become accustomed to earning very little on checking accounts, opting for safety and services offered by credit unions.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.