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Finally... the surprise we needed

You sometimes get what you've been asking for when you least expect it. Such was the case this week with the April FOMC minutes. Release of the official discussions between committee members is usually just routine, old information. Not this time. The April minutes revealed a shocker. Federal Reserve officials acknowledged the distinct possibility of a June rate hike if the data continues to show the economy moving forward. A few committee members were ready to increase the benchmark short-term rate at the April meeting, but other members overruled, wanting a bit more certainty of economic strength. Overall, the committee appeared confident of a second quarter rebound in growth and conveyed a sense of diminished global economic risks. This was the clearest, most unified opinion heard about a sooner, rather than later, rate move. One wrinkle to the June increase could be the upcoming Brexit issue, when Britain votes whether to stay or leave the European Union. The vote occurs one week after the June FOMC meeting. It is possible the Fed will choose to wait until July to move, due to the large uncertainty of that situation. The fed funds futures market is assigning a 30 percent chance to a June increase and a 51 percent chance to a Fed move in July.

Other Key Indicators this Week:

Housing – April was a good month for housing. Housing starts rose 6.6 percent in April after falling 9.4 percent in March. Permits were up 3.6 percent, a reversal of last month’s decline of 7.3 percent. Construction activity on new homes has been especially volatile the past year, making it difficult to get a solid picture of the industry. Builders continue to focus on higher-priced homes, rather than much-needed starter homes. Sales of existing homes are showing more solid progress, however. Existing home sales rose 1.7 percent in April to a three-month high annual rate of 5.45 million homes. Sales increased the most in the Midwest region, surging 12.1 percent, due to high affordability in that area. First-time buyers accounted for 32 percent of sales, up from 30 percent the previous month. The housing industry continues to face a battle of rising prices and declining inventory. The median home price is up 6.3 percent year-over-year, while supply has decreased 3.6 percent. Multi-family inventory and sales remain dominant over single-family homes.

CPI – Consumer prices rose 0.4 percent in April, the largest monthly increase in over three years. Higher energy prices largely drove the increase, with some pressure from rent and medical care costs. Energy prices increased 3.4 percent, and gasoline costs were up 8.1 percent, the largest monthly increase since 2012. The average price of a gallon of gasoline increased 11 of the past 13 weeks. Despite the monthly increase in prices, the core year-over-year CPI rate fell to 2.1 percent from 2.2 percent, down from the four-year high of 2.3 percent in February. The core rate is a key index the Federal Reserve uses to track inflation.

Strategically for Credit Unions:

The Treasury bond market moved dramatically this week in response to the FOMC minutes. Treasury yields increased 14 basis points across the curve in anticipation of an upcoming rate move. It is important to keep in mind, however, that over the long term, the Fed’s plan is to increase the short-term rate very slowly. The latest dot plot estimates the benchmark lending rate to remain under one percent in 2016 and not to reach 3.25 percent until 2018. Any signs that higher rates are causing pressure on the economy should make the Fed take a slower path.

Note: Due to the Memorial Day holiday weekend, the next issue of  Behind the Numbers will be June 3, 2016.

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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