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The Fed keeps us waiting

The Federal Reserve voted to keep the target federal funds rate at 0.25 to 0.50 percent during this week’s Federal Open Market Committee (FOMC) meeting. The decision was fully expected. Unlike last month’s unanimous vote to keep rates unchanged, this vote had one dissenter, Kansas City Federal Reserve President Esther George, who voted to raise the target rate by 50 basis points. A close review of the press release suggests the Fed may be laying the groundwork for a rate increase this year. Committee members acknowledged that "near-term risks to the economic outlook have diminished." "Near-term risks" may be the committee's code for Brexit. The initial fallout from Britain’s vote in June has subsided, and many economists do not think the repercussions will be as severe as once thought. The second key statement in the release, "…some increase in labor utilization in recent months," refers to the rebound in monthly job gains after a very disappointing gain of 11,000 jobs in May. Apparently, the FOMC is beginning to show signs of confidence in the economy. Whether they will vote to increase the target rate at the next meeting in September is still up for debate.

Other Key Indicators this Week:

Housing – New home sales surged in June to the highest level in eight years. Sales rose 3.5 percent to an annualized pace of 592,000. The jump in sales pushed down the supply of new homes on the market to 4.9 months, the lowest level since February. The lack of supply, in turn, created a 6.1 percent increase in the median price of a new home. Pending home sales, which measures the number of contracts signed, rose marginally by 0.2 percent. While the activity in June was small, it was a nice turnaround from a 3.7 percent decline in May. Analysts were expecting to see a larger volume of signings due to the decline in interest rates in June. Concern continues to grow that housing has reached its peak for the year.

GDP – The economy grew 1.2 percent in the second quarter, about half the rate analysts were expecting. Adding insult to injury, first quarter growth was revised down to 0.8 percent. The bulk of the expansion in the second quarter came from the consumer. Personal consumption rose 4.2 percent. The weak link in the economy is still the business sector. Corporate spending fell 2.2 percent after falling 3.4 percent in the first quarter. The only possible bright spot was a decline in inventories. Inventories fell the most since third quarter 2011. The silver lining here is the spurt of growth that may occur as companies begin to rebuild stockpiles.

Durable Goods – Durable goods orders fell 4.0 percent in June, a much larger decline than expected. Orders for May were revised lower to -2.8 percent from -2.3 percent. Transportation orders were a large part of the decline, falling 10.5 percent. Without the effect of transportation, orders were still in negative territory, falling 0.5 percent. On the bright side, the proxy for business investment was up 0.2 percent, the first increase in two months.

Consumer Sentiment – Consumer confidence measured 97.3 percent, barely changed from the previous reading of 97.4 percent. Expectations for the next six months fell from 84.6 to 83.3. Consumers are more optimistic about the availability of jobs, but not as optimistic about improving incomes. More respondents have plans for buying appliances over the next six months, but fewer plan to buy a car.

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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