MADISON, Wis. (9/24/09)--Federal Reserve policymakers Wednesday kept the target for federal funds rate set at a range of zero to 0.25%, saying that economic activity has picked up since their August meeting. And that means credit unions will see more downward pressure on their margins, says a Credit Union National Association (CUNA) economist. "Today's decision by the Federal Reserve will keep downward pressure on credit union net interest margins," said Steve Rick, CUNA senior economist, Wednesday. "Asset yields have been falling faster than funding costs for most credit unions as maturing investments and adjustable-interest-rate loans reprice down to the current extraordinarily low short-term interest rates," he said. The Federal Open Market Committee (FOMC) said it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. In addition to keeping the rates range, the committee also addressed other actions:
* To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Fed will purchase $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. * It will gradually slow the pace of these purchases to promote a smooth transition in markets. The committee expects the purchases to be executed by the end of the first quarter of 2010. * As previously announced, the Fed's purchases of $300 billion of Treasury securities will be completed by the end of October.
"The large supply of new Treasury bonds being dumped on the market--$30 billion per week--is putting upward pressure on longer-term interest rates. This has created the steepest yield curve since 2004," Rick told News Now
. "Historically, steep yield curves are good for credit union net interest margins because it makes the business of buying short-term deposits at low rates and lending them out longer-term at higher interest rates more lucrative. Of course this works only if you're lending the funds longer term," he said. "With credit union loan growth on pace to reach only 4% this year, the slowest pace since 1992, most of the new funds coming in are being placed in short-term low-rate investments," Rick said. "As the Federal Reserve policymakers noted in their statement, household spending remains constrained and faces many headwinds. Until those headwinds become tailwinds, credit union loan portfolios will post small gains and earnings will see continued downward pressure," he concluded. In a statement after its meeting, the committee noted it "will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Fed is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted." FOMC also noted that financial markets have improved and activity in the housing sector has increased. "Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit," it said. It also noted that businesses are cutting back on fixed investment and staffing at a slower pace and continue to make progress in inventory/sales ratios. "Although economic activity is likely to remain weak for a time, the committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability," said the FOMC. It also said it expected inflation "to remain subdued for some time."