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FOMC extends interest rate pledge
As NAFCU expected, the Federal Open Market Committee voted Wednesday to maintain the current zero-to-0.25 percent range for the federal funds rate, but the group extended its commitment to do so by an additional year.
The FOMC's policy statement, released following the vote, struck a cautious tone, using similar language to the previous one, said NAFCU Chief Economist Tun Wai. "There was a lot more focus on long-run objectives," he said. "The main news was the extended commitment to the current rate environment through late 2014."
The FOMC alsoannounced it is formally adopting an inflation target of 2 percent in an effort to keep long-term inflation expectations stable. Wai noted that the target is likely to have some flexibility as the Fed continues to support policies focused on fostering the recovery.
While the group's policy statement noted that "the economy has been expanding moderately," it acknowledged that global growth has slowed. TheFOMC also cited continued improvement in household spending and said inflation has been "subdued." The FOMC said expectations for household spending have become stable, with inflation expected to be "at levels at or below those consistent with the committee's dual mandate."
On the downside, the group said labor and housing markets remain depressed. Wai said the FOMC expects the unemployment rate to stay elevated for some time and views that as justification for its current growth-oriented policies.
To keep downward pressure on longer-term interest rates, the FOMC said it will continue its program to extend the average maturity of its holdings of securities. "It also intends to keep mortgage rates low by rolling over its investments in agency mortgage-backed securities," Wai said."The group will alsoaim fora stable balance sheet by reinvesting maturing Treasury securities."
The FOMC believes that by keeping rates lower for a longer time,it may boost a variety of lending markets that are related to it, the economist said. "But with rates already low, this is not likely to make economic waves," he cautioned. "The time extension of the historically low federal funds rate will make improvements on interest income more difficult for credit unions."
Ultimately, credit unions should plan accordingly for the extension of the low-rate environment. "Theyshould expect interest income to remain tepid," he said.
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