WASHINGTON (5/1/14)--As expected, the Federal Open Market Committee (FOMC) announced Wednesday it would continue tapering quantitative easing (QE) by $10 billion this month, while leaving the near-zero federal funds interest rate unchanged.
While the announcement comes as no surprise, economists at the Credit Union National Association see this continuing trend having far-reaching, and positive, effects on credit unions.
"The 10-year Treasury Bond interest rate fell a couple basis points after the FOMC announced that the taper of its QE program would continue at the $10-billion pace," Steve Rick, CUNA senior economist, told News Now. "This indicated that the bond markets had priced in the Fed move and that they will exit their QE program by this fall.
"Nevertheless, we expect the 10-year Treasury interest rate to rise over 3.25% this year as faster economic growth reduces the demand for government debt. Higher long-term interest rates, and faster loan growth will boost credit union asset yields this year, bringing to an end the four-year slide in credit union net-interest margins."
Rick added that he believes credit union asset yields will rise to 3.5% in 2014, up from the record low of 3.4% set in 2013, and reach 3.7% in 2015.
The Fed in its statement fell short of pinpointing the exact time when federal fund interest rates would begin to climb. Previously, Fed Chairman Janet Yellen has said that that shoe won't drop for at least six months after the completion of the asset-purchase program, expected to finish this fall.
Rick expects the Fed to raise rates starting in the summer of 2015.
"Interest rates will rise at a pace of one percentage point per year, for three years," Rick said. "This is much slower than what happened in 1994 when the Fed raised interest rates three percentage points in one year, and in 2004 when interest rates increased two percentage points per year for two years."
Rick also projects that interest rates will normalize in 2018, but at levels below previous plateaus "due to lower real interest rates and lower expected inflation for the foreseeable future."
Meanwhile, without a change in direction to short-term interest in 2014, Rick expects credit union cost of funds to bottom out at 0.58% of average assets, which would be the lowest in credit union history, and then rise only 11 basis points in 2015.