WASHINGTON (5/2/13)--The Federal Open Market Committee (FOMC) Wednesday said it is holding the line on the Federal Reserve's bond-buying policy and federal targeted interest rates yet another month. It also announced, for the first time, it would increase or decrease its bond buying policy "as the outlook for the labor market or inflation changes." That is reassuring to credit unions, said a Credit Union National Association senior economist.
The FOMC is the monetary policymaking body of the Federal Reserve. It made the announcement at the conclusion of its two-day meeting.
"Today's FOMC statement comes on the heels of a string of weak economic reports signaling the economy is struggling to gain traction," said CUNA Senior Economist Steve Rick on Wednesday.
"With this disappointing economic backdrop, the Fed reiterated its commitment for low long-term interest rates by its continued monthly purchases of $40 billion of agency mortgage back securities and $45 billion in Treasury securities. It even indicated it may 'increase' purchases if economic conditions so warranted," Rick told News Now.
"This 'quantitative easing' (QE3)--creating excess reserves to buy assets--is having an effect on the interest-rate-sensitive sectors of the economy like auto, housing and the stock market," Rick said.
"Credit unions are seeing the effect of monetary policy through the surge in new- and used-auto loans over the last year. Credit union new-auto loan balances rose 11.3% for the year ending in March, the fastest growing loan category," he said.
"Used-auto loan balances rose 9% over the last year, the second fastest growing loan category. But this loan growth is coming at a cost. Credit unions have dropped their rates on new and used auto loans by 0.5% over the last year, depressing their yield on assets and compressing the net interest margins," he added.
"Today's FOMC statement reassures credit union managers that the Federal Reserve will keep its foot on the monetary accelerator for the indefinite future," he said. "The markets are predicting the Fed will exit its QE3 asset purchase program in the first quarter of 2014 and begin raising the fed funds interest rate in the first quarter of 2015," he added.
The targeted federal funds rate for short-term loans remains at 0% to 0.25%-.The Fed has said in the past it would keep the rates at near-zero levels until unemployment fell to 6.5% or lower--if inflation forecasts were no more than 2.5%. Currently the unemployment rate is at 7.6%, and the inflation gauge is below the 2% target.
The FOMC noted that labor market conditions have shown some improvement in recent months but the unemployment rate remains elevated. "Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable," said its statement.
The committee said that "with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate" of price stability and fostering maximum employment.
FOMC "continues to see downside risks to the economic outlook" and "anticipates that inflation over the medium term likely will run at or below its 2% objective."
In keeping the target range for federal funds at 0% to 0.25%, FOMC said it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens," and that the "exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."
In determining how long to maintain the accommodative stance, the committee will consider more information on labor market conditions, inflation pressures and expectations, and financial developments. "When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%."
Voting for the policy action were Fed Chairman Ben S. Bernanke; Vice Chairman William C. Dudley; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.
Esther L. George, who voted against the action, said she was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.
For the full statement, use the link.