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How Many Ways Can you Say 'SLOW'?

We are accustomed to the financial markets changing direction every week, but not so much when it comes to the Federal Reserve. In the past two weeks, signals from the Fed have gone from “two instead of four” to “sooner than later” to “greater gradualism.” Federal Reserve Chair Janet Yellen’s comments this week reflected more concern about economic growth than expressed earlier. Yellen stressed that economic conditions are less favorable now than in December, when the Federal Reserve executed the first rate increase in more than eight years. The main concerns surround volatile financial markets and continued economic weakness abroad. Yellen conceded that the U.S. labor market is in good shape, but manufacturing and exports remain constrained by a strong dollar and weak demand from overseas. While core inflation is edging up, volatility in oil prices poses too much uncertainty to believe inflation rates will continue moving higher this year. Yellen stressed uncertainty in further improvement as a key reason for the Fed to proceed cautiously, with the best policy of “great gradualism.” Keeping interest rates near current low levels is an insurance policy for economic conditions.

Other Key Indicators this Week:

Jobs – The job report for March was good by most standards, but highlights a concern about the types of jobs that are filled. U.S. employers added 215,000 jobs, bringing the three-month average job gain to 209,000. The retail sector gained the most jobs, up 48,000. At the other end of the spectrum, manufacturing posted the greatest losses, down 29,000 jobs. The unemployment rate increased to 5.0 percent after being below that level for two months. The increase came from more people entering the job force, something that Federal Reserve Chair Janet Yellen has been hoping would happen. The labor participation rate rose to 63 percent, evidence that a greater number of people eligible to work are finding jobs. This was the highest rate in two years. The concern among economists, however, is the nature of jobs found. The underemployment rate increased to 9.8 percent, suggesting that people are settling for jobs below their ability, just to find work. Details in the report showed a gain of 135,000 part-time jobs filled by people desiring full-time work.

Housing – This week’s housing data provides a better view of the industry than previous reports. Pending home sales were up 3.5 percent, the largest increase in a year. The rebound may be a sign that winter volatility is over and buyers are being drawn back into the market by low interest rates. Three of the four regions posted increases. The Northeast was the only region where sales declined. The National Association of Realtors expects sales of existing homes to reach 5.38 million this year, an increase of 2.4 percent from 2015. Home prices rose 0.5 percent in January, according to the S&P/Case-Shiller National Home Price Index. This was the smallest monthly increase since August 2015.

Spending – Consumers spent less and saved more in February. Spending on goods and services increased 0.1 percent for the third consecutive month in February. The original estimate of a 0.5 percent increase in January was revised lower to 0.1 percent. Incomes rose 0.2 percent, pushing the savings rate higher to 5.4 percent.

Strategically for Credit Unions:

The latest information from the Federal Reserve does not bode well for an increase in interest income that many credit unions hoped for in 2016. The year is shaping up to be a mirror image of 2015. The yield curve continues to flatten from a wide spread of 120 basis points at the beginning of the year to just over 100 basis points now.

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.

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