See this week's numbersFriday, April 29, 2016

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No change this month

The Federal Open Market Committee voted to keep the benchmark short-term interest rate range unchanged at 0.25 percent to 0.50 percent. No surprise there. Most analysts believe the Fed has left the door open for a possible rate move at the June meeting. The press release closely matched the release in April, with a few minor changes. Less reference was made to the effects of global issues, and the Committee altogether omitted the statement that “global economic and financial developments continue to pose risks.” The Committee acknowledged the labor market has improved, but that overall economic activity has slowed. While real income has “risen to a solid rate”, household spending has moderated. Business investment remains soft. Esther George, president of the Federal Reserve Bank Kansas City was the only voter in favor of increasing the rate by 25 basis points. Both stock and bond prices rose slightly after the release, in what is now considered to be a dovish response to the decision.

Other Key Indicators this Week:

GDP – Economic growth in the first quarter was even slower than expected by most economists. The economy grew 0.5 percent between January and March, making it the slowest first quarter since 2014. Weather did not play as much of a factor this year as in the past two years, which makes the weakness in growth more disturbing. Business investment declined 5.9 percent, falling for the second quarter in a row. Consumer spending continues to add to overall growth, but on a weaker path. Spending rose 1.9 percent in the first quarter, a sharp decline from the 2.4 percent increase in the previous three months. A 12.4 percent decline in motor vehicle sales contributed to the weakness in spending. Exports continue to subtract from growth at a greater rate, falling 2.6 percent in the first quarter after a 2.0 percent decline in the fourth quarter.

Housing – The new home market is beginning to show some signs of softness. Sales of new homes declined 1.5 percent in March. This was the third consecutive month of negative sales. With inventory at the highest level since 2009, the median price of a new home declined 1.5 percent. Sales rebounded in the South and Midwest. On the bright side, pending home sales rose 1.4 percent to a 10-month high. The data supports the renewed strength seen in the existing home sale market. Last week’s data reported a gain of 5.3 percent of previously owned homes.

Spending and Income – The report on spending and income in March clearly supports the weak first quarter GDP data. Personal spending is not keeping up with increases in income or job growth. Personal spending rose 0.1 percent, half the expected amount. Incomes increased 0.4 percent in March, with 0.3 percent of that coming directly from wages. Consumers put most of the gain in income into savings. The savings rate increased to 5.4 percent, the highest level in more than a year.

Strategically for Credit Unions:

Treasury yields tried to move higher this week but receded to recent lows after the FOMC meeting. This pattern has repeated itself time and again, and is likely to continue. The low level of interest rates continues to push loan demand higher. Now is the time to take advantage of borrowing to fund loan demand if liquidity is becoming tight. The spread between borrowing and loan rates should narrow when the Federal Reserve makes the next interest rate move.

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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