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Small Cap Perspectives: Russell 2000 Index 1Q2017 Analysis

US economy and The Fed

Following the Fed’s December 2016 vote to raise the Fed Funds Rate a quarter point to a range of 0.5–0.75%, the Board of Governors decided to maintain that target in the first quarter of 2017. The Fed assessed conditions in the US labor market and the overall economy as favorable, with auto sales and housing activity strong contributors to economic growth.

The US Bureau of Economic Analysis (BEA), estimated that first quarter GDP growth was approximately 0.7%, which was down from 2.1% in the fourth quarter of 2016. A first quarter drop is not uncommon, and the BEA attributed growth to increases in personal consumption and housing activity. Unemployment remained historically low at 4.4% 3, and US home values increased by an estimated 6.8% in the last twelve months with a median value of $196.5K according to Zillow.

Through March 2017, core inflation was 1.6%, based on the Fed’s core personal consumption expenditures index. Inflation remains steady and below the Fed’s long-range target of 2.0%. At 1.8%, the total personal consumption expenditures index, which includes spending on energy and food, exceeded its 10-year average of 1.6% as food prices rose in the first quarter.

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