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Fed's Policy To Maintain Downward Pressure On CU Net Income--CUNA
WASHINGTON and MADISON, Wis. (3/21/13)--The Federal Open Market Committee's (FOMC) announced it would keep the Federal Reserve's quantitative easing (QE3) bond-buying plan intact, continue its forecast of a 6.5% jobless rate by 2015, and keep the federal funds target rates at 0% to 0.25%. That means continued downward pressure on credit union net interest income in 2013, said a Credit Union National Association economist.

"The FOMC statement reassures credit union managers that the Federal Reserve will keep its foot on the monetary accelerator for the indefinite future," CUNA Senior Economist Steve Rick said after the FOMC--the Fed's monetary policymaking group--issued its statement Wednesday.

"The markets are predicting the Fed will exit its QE-3 asset purchase program in the first quarter of 2014 and begin raising the fed funds interest rate in the first quarter of 2015," Rick told News Now. "The Fed reiterated its commitment for low long-term interest rates by their continued monthly purchases of $40 billion of agency mortgage back securities and $45 billion in Treasury securities.

"This will maintain downward pressure on credit union net interest income in 2013.  We are forecasting credit union assets yields to fall to 3.40% in 2013, down from 3.66% in 2012, the lowest in credit union history," Rick said.

"Credit union cost of funds, which are asymptotically approaching zero, will fall from 0.73% in 2012 to 0.60% this year.  With asset yields falling faster than funding costs, interest margins will fall to 2.8% this year from 2.93% last year, the lowest in credit union history. To put this into historical perspective, 30 years ago credit unions were earning a 5.3% spread," he said.

"Falling margins and the end of the mortgage-refi boom will cause credit union net income-to-average asset ratios to fall from 0.84% in 2012 to 0.75% in 2013, below the long run average of 1%."

Rick added the low interest rates have fostered an increase in demand for housing. "Home prices rose 5%-7% in 2012 and home inventories fell to cyclical lows.  This has increased the supply of mortgage credit by reducing the probability of defaults and foreclosures.  We expect home prices to rise another 3%-4% this year.  This could set in motion a virtuous cycle of rising home prices stimulating faster economic growth which then fosters rising housing demand and home prices," he concluded.

In its statement after its two-day meeting, the FOMC noted  "a return to moderate growth following a pause late last year" and said it "expects 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 fostering maximum employment and price stability.

"The committee continues to see downside risks to the economic outlook," said FOMC, which "anticipates that inflation over the medium term likely will run at or below its 2% objective."

In maintaining the federal funds rate at 0% to 0.25%, the committee "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."

In particular, " this 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," said the FOMC.

The committee also said that when it "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 monetary policy action: 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.

Voting against the action: Esther L. George, who expressed concern 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 FOMC statement, use the link.
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