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Two Days and Nothing New

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The two-day FOMC meeting revealed nothing new. The committee voted unanimously to keep the target interest rate at 0.75 to 1.00 percent. The press release noted that while economic activity slowed and household spending improved only modestly, fundamentals supporting the economy remain solid. Tepid first quarter economic growth likely was "transitory," and the economy should continue to expand at a moderate pace. Inflation continues to run close to the Fed's 2.0 percent longer-run objective. The one glaring omission in the press release concerned changes to the balance sheet. No mention was made of any plan to begin reducing the balance sheet, as the Fed alluded to in March. Some economists viewed this omission as a non-event, believing plan development is underway. Others viewed it as a sign the Fed may change its mind about reducing the balance sheet. The financial markets remained relatively unchanged after the press release. The fed funds futures market expectation for a June rate move is 94 percent, up from 63 percent before the meeting.

Other Key Indicators this Week:

Jobs – April made up for March and restored faith in the labor market. The U.S. added 211,000 jobs in April, a welcome rebound from the 77,000 jobs gained in March. The average monthly job gain for 2017 is 185,000. The unemployment rate fell to 4.4 percent, the lowest rate in a decade. The U6 rate, or the underemployment rate, considered by many the "real" unemployment rate, also reached a noteworthy low rate of 8.6 percent. This was the lowest level since November 2007. The strength in the labor market reflects growing confidence from business, despite the weak growth so far this year. If you want to find a weak component in the labor report, look at wages. Wages rose 2.5 percent over last April, the lowest annual growth since August 2016. Wages should rebound as the labor market continues to tighten.

Spending – A slowdown in spending keeps showing up in various economic reports. The most recent report revealed spending was flat in March for the second month in a row. This weakness was evident already with last week's initial look at first quarter GDP – household spending advanced at the slowest pace since 2009. Personal incomes increased 0.2 percent in March.  Economists are hoping a continued rise in incomes, a strengthening job market and optimism stemming from Washington will influence consumers to begin spending as the year continues. The PCE index, one of the key measures used by the Federal Reserve to gauge inflation, fell to 1.8 percent, the first decline since 2016.

Auto Sales – Sales at the major automakers declined in April to 16.8 million on an annualized basis.  This was the second month in a row that sales fell below 17 million. Demand was stronger for light trucks, while demand for cars diminished. More troubling than low sales is the high overhang of inventory. Dealerships reported autos remaining on the lot for an average of 100 days, a 10-year high for the industry. The daily sales rate fell 1.2 percent from a year ago. The sluggish sales suggest the auto industry may have reached its peak. People will continue to buy cars, but not at the robust pace that has fueled the economy for the past several years. The slowdown is already showing up in manufacturing data. The latest durable goods orders report noted a 2.6 percent decline in automotive products, the largest drop since May 2016. Automakers may be forced to shut down production this summer if slow sales continue.

Strategically for Credit Unions:

Markets continue to believe the Fed will raise interest rates in June and possibly later this year. Credit unions should be able to maintain current deposit rates. This should help increase net interest income as loan rates gradually move higher.

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.