Sept. 14, 2012 – The Federal Open Market Committee on Thursday announced a third round of quantitative easing that NAFCU Chief Economist David Carrier says should be considered by credit unions in their planning for a continued low-interest rate environment.
Carrier said the QE3 announcement, which was expected, will involve a new round of large-scale asset purchases by the Fed. “Credit unions will need to plan ahead for the effect the extended low-interest rate environment will have on interest rate risk and their loan portfolios,” he said.
The first round of easing, or QE1, carried out between November 2008 and March 2010 and involved purchases of $1.25 trillion in mortgage-backed securities and long-term Treasury securities. QE2 was launched in November 2010 and concluded by June 2011. That round involved purchases of another $600 billion of long-term Treasury securities.
In the program announced yesterday, the Fed will continue its average maturity extension program, continue reinvesting its current holdings and purchase additional agency mortgage-backed securities at a pace of $40 billion a month. These steps combined will increase the committee's holdings of longer-term securities by about $85 billion a month through this year-end. This action is aimed at helping keep down longer-term interest rates, support mortgage markets and generally improve financial conditions.
Additionally, the committee voted to keep the federal funds rate target range at 0 to 0.25 percent and expects exceptionally low levels for that rate will likely be warranted at least through mid-2015.
Federal Reserve Chairman Ben Bernanke hinted at QE3 during a conference late last month. He reiterated that the Fed took seriously its dual mandate of keeping both inflation and unemployment low and acknowledged there had had been some limited success with the latter mandate. At the time, he said, the Fed’s target was about 6 percent unemployment.
“The Fed believes the previous two rounds of asset purchases had a significant impact on reducing long-term interest rates and were effective at increasing employment by 2 million jobs over the last four years,” said Carrier. “The central bank clearly expects that the next round of asset purchases will have a similar effect in generating new employment over the next couple of years."
The FOMC's full statement is online.