See this week's numbersFriday, March 3, 2017

The Fed and interest rates?

Headline Consumer Price Index (CPI) has increased more than most analysts projected, driven largely by gains in the always volatile energy sector. Core inflation, which backs out volatile commodities, such as food and energy, is approaching the Fed’s target inflation level. Consumer credit growth is at a goldilocks level of four percent – not too fast like the early 2000s, but not restrictive like the post-credit bust of 2009. And, the new administration will be proposing fiscal stimulus and tax cuts. These factors position a March move by the FOMC at 92 percent probability, as measured by Fed Fund Futures.

Other Key Indicators this Week:

GDP – The Bureau of Economic Analysis’ second estimate showed the U.S. economy grew 1.9 percent in the fourth quarter 2016. While much slower than third quarter's 3.5 percent growth, it exceeded the 1.7 percent average for the prior four quarters. Consumer and investment spending led the growth. The slowdown came primarily from a drag on trade. Trade decreased 1.7 percent, as exports fell and imports increased. Consumer spending was revised higher from 2.5 percent to 3.0 percent for the quarter. The U.S. economy is performing well, and near-term prospects remain good. Real GDP growth is tracking near two percent in the current quarter, equal to the prevailing growth rate over the eight-year expansion.

Vehicle Sales – Vehicle sales slipped in February by 0.2 percent to 17.59 million annualized units. Though sales remain strong, auto inventories have risen. For the moment, most analysts do not perceive this will have any bearing on auto production. Inventory is still a respectable 74 days, compared to 85 days in January and 69 days in February 2016.

Strategically for Credit Unions:

The economy appears solid, and Consumer Confidence indicators have moved higher in recent months. If the new administration can get most of their fiscal policies through Congress, creating revenue to offset tax cuts, GDP could ratchet up another gear. The Fed will need to raise rates in step with the bond market. If inflation moves higher, credit unions may want to consider shortening duration of their investment portfolio. Shortening maturities will generate cash inflows that can be redeployed at a faster pace to take advantage of a rising rate environment.

Allen Schiliro – 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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