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Market Reaction to Fed Taper Bodes Well for Loans, Says CUNA
MADISON, Wis. (12/19/13)--The market reaction to the Federal Open Market Committee's decision Wednesday to taper its asset-buying program is good news for housing and auto lending, according to a Credit Union National Association economist.
"The fact that interest rates did not jump after the taper announcement is good news for interest-rate sensitive sectors like housing and autos," said Steve Rick, CUNA senior economist. "This will keep these very important credit union lending categories growing strong well into 2014."
CUNA is forecasting overall credit union loan growth to exceed 7% in 2014 as the economy's growth rate approaches 3%, Rick added.
After its two-day meeting, the Fed policy-making group announced it would "modestly reduce the pace" of its monthly asset-bond purchases to $75 billion per month from $85 billion, beginning in January.
"It's important to realize that this taper is not equivalent to Fed tightening monetary policy," Rick said. "It is a slowing in the expansion of monetary policy, which still remains highly accommodative."
He added that it appeared the taper of quantitative easing (QE) was priced into the bond market, which saw little movement in the 10-year Treasury interest rate after the announcement. The equity markets, however, rallied over 1% in the first hour of trading after the Fed's announcement.  
During his final press conference as Fed chairman, Ben Bernanke said similar, moderate taper steps would continue throughout 2014 to bring QE to an end later next year.
In a 9-1 vote, FOMC also reaffirmed the low target rate of the federal funds rate at 0% to 0.25%.
The monetary policy committee also gave more clarity on "forward guidance" related to its interest-rate target for Fed funds, Rick noted. "The forward guidance is for exceptionally low short-term interest rates until the jobless rate falls 'well past' 6.5%. The unemployment rate is currently running at 7%.
"Translation: Don't expect the Fed to raise short-term rates until well into 2015, if not 2016. This will keep credit union cost of funds at record low levels and asset yields under downward pressure," said Rick.
To offset this "rate effect," Rick said that credit unions would continue to alter the mix of their balance sheet toward higher-yielding assets.
Voting for the FOMC monetary policy action were Bernanke, Vice Chairman William Dudley, James Bullard, Charles Evans, Esther George, Jerome Powell, Jeremy Stein, Daniel Tarullo and chair nominee Janet Yellen. Eric Rosengren, who voted against the action, said he believes that with an elevated unemployment rate and below-target inflation rate, changes in the purchase program are premature.
See related News Now story, Fed Tapers Bond-Buying Program by $10B a Month, by using the link.
For the full statement from FOMC, use the link.

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