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New clues from the FOMC

Training Opportunities

Finally, for a change, the Federal Reserve gave the financial markets some positive information to chew on. The minutes from the early May FOMC meeting revealed policy makers were in fact developing a plan to reduce the balance sheet. As a reminder, the press release following the May meeting did not mention balance sheet changes at all. Investors questioned how serious the Fed was about trimming excess holdings. The minutes released this week revealed "nearly all policymakers" approved of the plan to gradually shrink the $4.5 trillion in  holdings this year. The plan is to set limits for the dollar amount to run off each month, gradually increasing the amount every three months until they reach a fully phased-in level. By setting the increments ahead of time, the Fed can let the balance sheet run-off operate in the background, without having to address it at each FOMC meeting. The hope is this process will eliminate market guesswork and unnecessary volatility.

Other Key Indicators this Week:

Housing – Home sales were less than stellar in April. Sales of both new and existing homes declined more than expected, reversing the gains reached the prior month. The number of existing homes sold fell 2.3 percent, as inventory declined nine percent from a year ago. Properties sold in 29 days, the shortest timeframe since recordkeeping began in 2011. The lack of inventory continues to put pressure on prices, which rose 6.0 percent in April. The number of contracts signed for new homes declined 11.4 percent. The new home market is suffering from the opposite trend of the existing home market – too much inventory at too high a price. The average price of a new home fell 3.8 percent from a year ago, and the supply of homes is at the highest level since September 2015.

GDP – Growth in the first quarter was better than previously estimated, thanks once again to the consumer. First quarter GDP rose 1.2 percent, an increase from the initial estimate of 0.9 percent. Consumer spending rose 0.6 percent, double the amount previously reported. Spending on services was stronger, and purchases of durable goods declined less. Business investment surged 11.4 percent, due mostly to energy sector investment. The large increase likely will be revised lower next month to a more realistic rate. Auto sales subtracted half a percentage point from growth.

Durable Goods Orders – Orders for goods meant to last three years and longer declined 0.7 percent in April, after increasing 2.3 percent in March. Business investment remained unchanged for the second month in a row. Economists had been hoping to see some improvement, as businesses were showing optimism in the economy earlier in the year.

Between the Numbers:

Household financial health is modestly improving. In 2016, 70 percent of Americans said they were living comfortably/doing OK, up from 69 percent in 2015 and 62 percent in 2013. Similarly, the percentage with no retirement savings has declined from 31 percent in 2014 to 28 percent in 2016. And, while 44 percent of Americans wouldn't be able to pay cash for an emergency $400 expense, that's down from 46 percent in 2015 and 47 percent in 2014. from Eliot F. Eisenberg, Eliot's Brief Blog

Sarina Freedland – Senior Investment Officer

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