www.CUNA.org/newsnow WASHINGTON (12/15/10) Federal Reserve policymakers' announcement that it will maintain interest rates on targeted funds and keep its existing quantitative easing (QU2) policy of purchasing $600 billion in bonds is good for credit unions' future net interest margins, according to Steve Rick, senior economist with the Credit Union National Association (CUNA).
"Tuesday's Federal Open Market Committee (FOMC) statement
reiterated its desire to use the Federal Reserve's balance sheet to keep downward pressure on interest rates to invigorate a moderate recovery," said Rick, after the meeting. The committee's "recently announced QE2 policy, whereby the Fed purchases $600 billion of Treasury securities to drive interest rates lower and drive investors into riskier assets, seems to be working quite well. Maybe too well," he said.
"This is basically an $850 billion fiscal stimulus plan, which along with the Fed's expansionary monetary policy should boost 2011 economic growth to around 4%, up from the previous consensus estimate of 2.5%," Rick said, adding, "This should bring down the unemployment rate to 9% by the end of 2011. Still high, but moving in the right direction."
"Recent strong economic data and lower risk aversion have encouraged investors to move their funds out of the ultra-safe Treasury securities and into stocks, corporate bonds and commodities. This has pushed the 10-year Treasury to 3.45% today, up one percentage point from the recent low of 2.41% just two months ago. This recent run-up in long-term rates highlights the economic truism that the Fed controls short-term interest rates but not longer-term interest rates," Rick told News Now
"The rise in the 10-year Treasury interest rate over the last couple of months has increased mortgage interest rates. This may have the effect of pushing potential homeowners off the fence and encourage them to pull the trigger and purchase a house before interest rates rise further," he said.
"Higher long-term interest rates have also steepened the yield curve, which is good for credit union net interest margins going forward," Rick added.
The Fed also reiterated its commitment to keeping the fed funds interest rate in their target range of 0% to 0.25% for an extended period of time. "What is 'an extended period of time'? The fed funds futures market is now pricing in a 25 basis point rate increase by the Federal Reserve at this time next year," Rick said. It also "is pricing in an extension of the Bush tax cuts across the board, a 13-month extension of federal unemployment insurance benefits and other spending increases and tax cuts."
The committee's move was no surprise. Its statement noted that the economic recovery is continuing,"though at a rate that has been insufficient to bring down unemployment." It recognized that household spending is increasing moderately but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
The $600 billion bond purchases will occur by the end of the second quarter of 2011, a pace of about $75 billion per month," said the committee. "FOMC will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability," the statement said.