FOMC Leaves Overnight Target Rate Unchanged; Cites Improved Conditions

Brian Turner
March 25, 2010 | COMMENTS

The FOMC preserved their overnight benchmark rate in the 0 percent to 0.25 percent range reiterating their outlook that rates will remain at low levels for an "extended period." In their accompanying remarks they noted:
 
"Economic activity has continued to strengthen and the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, and lower housing wealth.”
 
"Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability... 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."
 
The voting was unanimous but with one exception: Thomas Hoenig, head of the Kansas City Fed, dissented on the use of "extended period.” The committee will be closing four of the temporary loan facilities enacted to inject liquidity during the financial crisis in early 2009. That will be good news to investors fearing the long-term inflationary effect of such actions.
 
For Credit Unions

With liquidity overflowing for most, this will help to keep non-term share rates down for most of 2010. It will also gravitate over to retaining term certificate rates down as well—both important elements in managing cost of funds over the next three or four quarters. The "moderate rate" of household spending has a had direct correlation with the modest 1.6 percent loan growth in 2009 and a less than stellar outlook for the first half of 2010. This will require credit union managers to remain proactive with their investment portfolio activities in order to retain current income streams. (In the current market, for every $1 in loan principal received, you must invest at least $2.50 in investment portfolio assets).
 
It will be very interesting to see whether as the economy continues to recover through the summer,  how much of the "pent up" consumer demand might work its way out of the doldrums—even if it only creates a short-term spark to the economy. This would particularly impact auto sales and contribute to improved vehicle lending at credit unions. Although overall vehicle loans outstanding contracted slightly in 2009 (-0.5 percent), used car loans were up about 4.3 percent while new car loans were down 6.1 percent.
 
Brian Turner is directly of advisory services for Southwest Corporate Federal Credit Union. Reprinted with permission from the Texas Credit Union League.