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What the Fed was really saying

We know the Federal Open Market Committee voted to keep the target short-term rate unchanged in July. We know they shifted from a "risks are balanced" to a "risks diminished" outlook. This week’s release of the meeting minutes, however, gave us more insight into what the committee members were really discussing. Some members believed a rate increase could soon be warranted. In fact, several members were ready to pull the trigger at that meeting. Those in favor of a sooner-than-later rate move expressed concern that keeping rates at the current low level could be creating more risk by forcing investors to reach for yield, which could impact financial stability.

The members in favor of waiting to increase interest rates voiced concern that inflation will fall short of the Federal Reserve’s two percent target. There is also some worry that the future pace of hiring could slow as we approach full employment. Overall, the committee is optimistic about the economy, but wants to keep its options open. Unfortunately, the optimism wasn’t strong enough to translate into a rate move this time around. Maybe it will in September.

Other Key Indicators this Week:

Consumer Prices (CPI) – The cost of living was unchanged in July. All measures within the consumer price index were lower from the prior month. July’s zero percent change was a decline from June’s gain of 0.2 percent. The core rate, which strips out food and energy, increased 0.1 percent, half the rate of change a month ago. Gasoline prices fell 4.4 percent, the first decline in five months, and food prices were unchanged. The most significant changes in July included a 2.4 percent drop in hotel prices and a 2.5 percent decline in public transportation, most of which was airline prices. By the looks of the airports I have been in this summer, the low fares have certainly contributed to an increase in travel! The year-over-year core inflation rate measured 2.2 percent, just shy of the 2.3 percent from June. The core rate has fluctuated between 2.0 percent and 2.3 percent for the past nine months. While not the index the Federal Reserve uses to measure inflation, it is a good reflection of the lack of price pressure in the economy.

Housing – Construction on new homes rose 2.1 percent in July, up 5.6 percent from a year ago. More homes were under construction in July than at any time since the recession began in 2008. Activity in multi-family homes continues to beat out single-family construction, however. Multi-family starts increased 5.0 percent, while single-family starts rose 0.5 percent. Single-family building is currently 25 percent below historical levels. Builders continue to see strong demand for housing, but cite higher land prices and tougher regulations as reasons for the lack of supply of homes. Permits, a sign of future activity, fell 0.1 percent.

Strategically for Credit Unions:

Despite the level of optimism in the FOMC minutes, the financial markets are ignoring the possibility of a rate move. Treasury yields stayed below key levels (0.75 percent, two-year note and 1.60 percent, 10-year note), and stock indices remained in positive territory. Even if the Federal Reserve raises the benchmark rate this year, most economists believe the yield curve will continue to flatten. Demand from central banks, insurance companies and pension plans will keep the supply limited and yields low.

Note: Remember to register for Catalyst Corporate's 39th annual Economic Forum, October 3-5. For details and to register, go to

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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