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CUNA On Fed Decision: Margin Compression To Continue To Mid-2014
MADISON, Wis. (10/31/13)--Yesterday's decision by Federal Reserve policymakers to stay the course on its $85 billion-a-month asset buying (quantitative easing) program and keep the target funds rate at 0% to 0.25% will continue to compress credit unions' margins, at least through mid-2014, according to a Credit Union National Association economist.
"The decision by the Federal Reserve to maintain the status quo with respect to monetary policy will keep credit union asset yields and funding costs reaching new record lows," said CUNA Senior Economist Steve Rick.
"Preliminary call report data from the National Credit Union Administration indicates that yield-on-asset ratios fell seven basis points in the third quarter, to 3.27%.  This is down from the 5.9% reported in 2007, right before the onset of the great recession," he said.
"Credit union cost-of-funds ratios also fell seven basis points in the third quarter to reach a record low of 0.52%," Rick said. "This is down from the 2.8% reported in 2007. Credit union net interest margins therefore remained at 2.75% in the third quarter--the lowest in credit union history and down significantly from 3.10% six years ago.
"The tight margin environment is forcing credit unions to lower operating expense-to-average-asset ratios. So far this year, operating expense ratios are running at 3.14%, down from 3.38% six years ago," Rick added.
Rick recognized that market expectations are for the Federal Reserve to begin tapering of its quantitative easing in the first half of 2014.  "The tapering and faster economic growth will push up the 10-year treasury interest rate to over 3.25% in 2014," he said. "This will raise mortgage interest rates and slow the decline in credit union asset yields.  We should therefore see a slowdown in credit union margin compression by mid-year 2014."
Rick made the comments after the Fed's monetary policymaking group, the Federal Open Market Committee, voted 9-1 to stay the course on its bond buying and target rate policy. The FOMC met Tuesday and Wednesday, with results that were expected.
The committee noted that "economic activity has continued to expand at a moderate pace." It cited "some further improvement" in labor market conditions but noted "the unemployment rate remains elevated." Its statement recognized that "household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months."

It also noted that "fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the committee's longer-run objective, but longer-term inflation expectations have remained stable."
The FOMC said it "expects that, with appropriate policy accommodation, economic growth will pick up from its recent 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.

It "sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall" and "recognizes that inflation persistently below its 2% objective could pose risks to economic performance," but the committee said it "anticipates that inflation will move back toward its objective over the medium term."

Keeping in mind the "extent of federal fiscal retrenchment over the past year," the FOMC noted it "sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

Voting for the FOMC monetary policy action were: Federal Reserve Chairman Ben S. Bernanke, Vice chairman William C. Dudley, James Bullard, Charles L. Evans, Jerome H. Powell, Eric S. Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen, the nominee to succeed Bernanke at the end of his term in January.

Esther L. George, who voted against the action, was concerned 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.

See related News Now story, NEW: Fed Policymakers Maintain QE3 Pace, by using the link.

The full FOMC statement can also be accessed through its link.

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