news.cuna.org/articles/107602-cuna-expert-assesses-fed-rate-decision-in-wsj

CUNA expert assesses Fed rate decision in WSJ

September 18, 2015

WASHINGTON (9/18/15)--After news broke that the Federal Reserve chose to keep interest rates pinned at their near-zero levels, the Wall Street Journal collected reactions from economists nationwide, including that of CUNA Senior Economist Perc Pineda.

Pineda told theJournal that it was apparent the Federal Open Market Committee (FOMC) had taken seriously recent international economic strife, along with other economic factors, when it decided to hold off on hiking interest rates for the first time since the recession.

“While the Fed is focused on the health of the U.S. economy, as it should be, weaknesses outside the U.S. appear to be driving caution with regards to a monetary policy move,” Pineda said. “Recent inflation numbers offered no sign of urgency to ratchet down aggregate demand through higher interest rates. The balancing act of the Fed, whether to raise rates or not, continues.”

In recent months, analysts were all but certain the FOMC, which completed its two-day policy-setting meeting yesterday, would raise rates at its September meeting. In fact, the closely watched “dot plot” the Fed releases alongside its traditional policy statement had at one point forecasted two interest rate hikes before the end of the year.

But energy prices continue to lag and economic uncertainty abroad has propped up the U.S. dollar, developments that bode poorly for economic expansion and movement toward the Federal Reserve’s 2% inflation target.

Still, the dot plot accompanying this meeting’s policy statement estimates at least one interest-rate hike before the end of the year. The FOMC has two more two-day meetings scheduled for 2015: Oct. 27-28 and Dec. 15-16. The dot plot represents forecasts by all 10 voting members of the FOMC on when they expect to raise interest rates.

“Weaknesses in emerging markets are keeping the U.S. dollar strong, which is going to weigh on U.S. manufacturing, an area of the U.S. economy that currently could use a boost,” Pineda told News Now. “The theory that lower interest rates will reduce capital inflows, which then weakens the U.S. dollar, rests on the assumption that economies outside the U.S. are growing.

“In a scenario where economies outside the U.S. are weak, the U.S. dollar remains the ultimate currency hedge, and so even if rates remain low, there will still be capital inflows into the U.S. and the U.S. dollar will continue to strengthen.”

Pineda also discussed what the ramifications for financial institutions and consumers will be once the Fed finally does decide to raise interest rates.

“Middle-class working Americans, most of whom need to smooth out consumption through borrowing, are directly impacted by changes in interest rates, particularly short-term interest rates, on which the Fed has more influence than long-term rates,” Pineda said. “A Fed funds rate hike, however, is not going to cause higher auto-loan and mortgage rates immediately.

“For a start, banks have maintained a wider interest-rate margin than credit unions, even at the current low Fed funds rate. Credit unions, on the other hand, have narrower interest margins than banks and therefore credit union net margins will be squeezed if Fed funds rate increase.”