www.CUNA.org/newsnow (6/24/2010) The Federal Open Market Committee's (FOMC) announcement that the Federal Reserve policymaking group would maintain the target range for the federal funds rate at 0% to 0.25% means credit unions should settle in and get used to low rates, according to Steve Rick, senior economist at the Credit Union National Association (CUNA).
The FOMC's statement "has increased the likelihood that the Federal Reserve will borrow the Bank of Japan's monetary policy play book and keep interest rates exceptionally low for a really, really long time, rather than just the "extended period" language used in its press releases," Rick told News Now.
"The Federal Reserve noted the weak housing and labor markets will weigh on the nascent and fragile economic recovery. As government economic stimulus spending wanes later this year, it appears the consumer and business sectors will not be in a good position to grab the economic growth baton," Rick said.
"And with the Euro-Zone debt crisis possibly shaving 0.5 percentage points off second-half GDP (gross domestic product) growth, the specter of deflation is now more likely than not," he said.
"The fed funds futures market is not pricing in an interest rate increase until the second quarter of 2011. We may not see any rate increase, however, through all of 2011. Credit unions should settle in and get used to exceptionally low interest rates for quite some time," Rick said. "It's time to accept and adjust to this new abnormal economic environment," he said.
In its statement after its two-day meeting, the FOMC said it continues to anticipate that economic conditions, including low rates of resource use, subdued inflation trends, and stable inflation expectations, are "likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. However, the FOMC said it anticipates a gradual return to higher levels of resource use in a context of price stability -- although the pace of economic recovery is likely to be moderate for a time.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time, the committee said.
The FOMC said it will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, chairman; William C. Dudley, vice chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.
The lone dissenter was Thomas M. Hoenig, who said that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the FOMC's flexibility to begin raising rates modestly.
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