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The waiting game continues

Once again, we continue to wait, although what we are waiting for is becoming increasingly unclear. The Federal Open Market Committee (FOMC) voted seven to three in favor of waiting to increase the target range for the federal funds rate, at least for the time being. Despite a few economists who were hoping to be surprised, the lack of a rate change was almost fully expected. The good news is the committee acknowledged the case "has strengthened" for an increase in the federal funds rates. But, as Federal Reserve Chair Janet Yellen stated in the press conference, the committee chose to take a cautious approach and "wait for further evidence of continued progress toward its objectives." The committee feels it can respond better to rising inflation by increasing rates, rather than having to cut rates in the future.

The FOMC once again lowered their quarterly interest rate and economic projections. The annual median federal funds rate was lowered between 25 and 50 basis points across the board. The long-range forecast (past 2019) is at 2.9 percent compared to the previous long-term forecast of 3.0 percent. Near-term, the Fed projects ending the year at a median rate of 0.60 percent, which equates to one increase this year. My bet is for a holiday hike in December, repeating the last interest rate move in 2015.

Other Key Indicators this Week:

Housing – August may have been a hot month across the country, but it wasn’t a hot housing market. The first two housing reports for the month reflected a setback in the industry. Existing home sales declined 0.9 percent to a six-month low rate of 5.33 million homes. The number of homes on the market fell 10.1 percent from a year ago, the fewest homes since March. A lack of inventory has been one factor that continues to hold down activity. Sales were down in three of the four regions, with the South falling the most by 2.7 percent. The South also fared poorly for construction activity. Housing starts tumbled 14.8 percent in the South, which more than offset the gains in the other regions. Total housing starts fell 5.8 percent with both multi-family and single-family construction decreasing. The silver lining in the weak report was a 3.6 percent increase in permits for single-family housing. Permits are an indicator of future activity.

Leading Indicators – The Conference Board’s Index of Leading Economic Indicators declined 0.2 percent in August, to 124.1. This was the first decline in three months. The overall trend still points to moderate economic growth in the coming months, as the strengths and weaknesses are roughly balanced. Most of the positive contributions are coming from the financial indicators. The non-financial indicators, including hours worked and new orders, suggests there are still some risks to growth.

Strategically for Credit Unions:

The lack of a Fed move can only be described as frustrating for all of us. As much as we, both as a consumer and financial institution, would like to see an end to this extended low rate environment, it is not going to happen this month. However, the Fed’s hint at increasing rates later this year should create a pickup in loan demand. A quarter point increase in interest rates may not have a huge impact in the long run, but the psychological impact on consumers could make them act sooner than later. The yield curve flattened after the FOMC meeting, as the 10-year note yield continues to trade off increased global demand and lack of inflation.

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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