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Fed continues easing, stands pat on interest rates
WASHINGTON (7/30/14)--Citing "sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions," the Federal Open Market Committee (FOMC) announced Wednesday it will continue the pace of its quantitative easing program and stand pat on interest rates.
 
The announcement came at the conclusion of the FOMC's two-day policy meeting this week.

Beginning in August, the committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month.
 
"There is nothing especially surprising in the latest Fed minutes--we expected a decline in bond purchases and in line with the $10 billion reported," the Credit Union National Association's interim Chief Economist Mike Schenk told News Now. "We likewise expected the Fed to stand pat on short rates.  More importantly, we anticipated the fact that there would be no significant shift in language that might signal impending increases in the Fed Funds rate."
 
Previously, the Federal Reserve's monetary policy-making body has been shaving down the amount of bonds and securities it has been buying over the last few months--purchases that have injected much-needed cash into the lending industry and subsequently the economy--by $10 billion every month (News Now June 18).
 
This week's data shows that the economy grew at a fast clip in the second quarter--a 4% annualized increase--and the conference board's recently released consumer confidence index surged to a recovery high of 90.9.  At the same time labor markets are healing somewhat faster than many expected as reflected in five consecutive months of 200,000-plus gains in non-farm employment. 
 
ADP data suggests another gain of that magnitude when the Bureau of Labor Statistics releases data later this week.  "If so, that will be a six-month run of strong gains--the likes of which haven't been seen in 17 years," Schenk told News Now.
 
Still, Fed Chair Janet Yellen has repeatedly stressed the need to look beyond headline results in the labor statistics--where significant challenges are more obvious, Schenk said. For example, the U-6 unemployment rate (which accounts for those who have dropped out of the labor force and those who are working part-time but want to be working full-time) is six points above the 6.1% headline rate, while the norm is closer to a 4.5 percentage point difference. The average duration of unemployment stands at roughly 35 months--about double the long-run average. 
 
"This means that the yield curve is likely to remain little changed in the coming months," Schenk explained.  "That will continue to help buoy credit union bottom-line results and should result in additional lending opportunities.
 
"We expect a surge in loan demand as the market interest rate inflection point nears because an increasing number of consumers will jump off the sidelines, adopting a 'get-while-the-gettings good attitude' in an attempt to time borrowings with the increase in rates.  It also, means, that credit unions that feel the need to make balance sheet adjustment to avoid any nasty consequences related to interest-rate-risk exposure still have the time to do so."


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