CUs can draw two conclusions from Fed action, says Hampel

WASHINGTON (8/11/10)--Credit unions can draw two conclusions from Tuesday's action by the Federal Open Market Committee (FOMC), the Federal Reserve policymakers, said Bill Hampel, Credit Union National Association chief economist, after the Fed announced it would maintain the target rate for federal funds and reinvest in mortgage-backed securities.

"Although the Fed [policymakers] announced no change in interest rate policy at Tuesday's meeting, their statement suggests they are concerned about the slowing of the recovery," Hampel said.

"From this we can draw two conclusions. First, it will be well into next year before the federal funds rate is increased from its current range of 0 to 25 basis points," he told News Now. "Second, should the economy show any more signs of weakening in the coming few months, the Fed is very likely to resume its purchases of longer term debt securities, known as "quantitative easing", which would further lower longer term interest rates," he added.

"The Fed is signaling that it is ready to act with more quantitative easing if necessary to prevent the economy from falling into a deflationary spiral," Hampel said.

The FOMC said in a press release after its meeting that it will "maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

"To help support the economic recovery in a context of price stability, the committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities," the committee said, adding it will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

Since its June meeting, the committee acknowledged, "the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract."

Nonetheless, the committee continued, it "anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated." It also said inflation measures are trending lower in recent quarters and that "inflation is likely to be subdued for some time."

The committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability, it said.

Voting against the policy was Thomas M. Hoenig, who said the economy is recovering modestly, as projected. He maintained that continuing to express the expectation of "exceptionally low levels" of the federal funds rate for an "extended period" was no longer warranted and limits the committee's ability to adjust policy when needed.

Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the committee's policy objectives.

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