CUNA’s Schenk indicates Fed QE3 decision should make members more confident

The Federal Reserve (Fed) monetary policymakers' decision not to reduce the purchases of $85 billion a month in Treasury bonds and mortgage backed securities isn't a surprise, and may result in more confidence about the economy among credit union members, said a Credit Union National Association (CUNA) senior economist.

"The Fed's decision to maintain current bond purchase volumes wasn't terribly surprising," said Mike Schenk, CUNA vice president of economics and statistics.  (Schenk is the featured speaker at the An Expert’s View of the Economy - a League “Network Members Only” Event on Thursday, October 24.  Please click the link for more information.)  

He was referring to the September 18 decision by the Federal Open Market Committee (FOMC), the Fed's monetary policymaking body, to maintain the level of purchases in its quantitative easing program and to keep the targeted federal funds rate in the 0% to 0.25% range. Many had expected the Fed to announce after the FOMC's two-day meeting that it would start token tapering of the bond buying, but that did not happen.

"The backdrop of still-weak labor markets, low current inflation, and no big inflation increases on the horizon gave the Fed all the excuse it really needed to maintain its current bond-buying activities," Schenk said. "Add to that nearly complete dysfunction on Capitol Hill as we approach critical decisions on the debt ceiling, budget and looming additional cuts in government spending, and the case becomes that much stronger," he said.

He noted the "market's immediate and harsh reaction after [Fed Chairman Ben Bernanke's] May comments that perhaps-the-Fed-might-be-thinking-of-possibly-someday-maybe-dialing-back-but-not-stopping was certainly a key factor.

"In any case, the Fed's 'no-slow' announcement signals additional stimulus--at least for the near term--which will keep long rates low, all else equal, energize equity markets, and help to stabilize emerging market currencies," Schenk said.

"For credit unions, the result will be members that are more confident (at least marginally), housing and autos that are marginally more affordable, and by extension marginally higher demand for loans, relative to where we would be if tapering actually started," he said. "The announcement isn't a game-changer but will undoubtedly help to provide needed support."

In its announcement, the FOMC said that although market conditions have improved somewhat, the "unemployment rate remains elevated: and that it would "await more evidence that progress will be sustained before adjusting the pace of its purchases."

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, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market."

The statement noted the committee "recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."

The FOMC will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.  It also will continue reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

"Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the committee's dual mandate," the committee said in its statement.

"In judging when to moderate the pace of asset purchases, the committee will, at its coming meetings, assess whether incoming information continues to support the committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective," the committee said, cautioning that "asset purchases are not on a preset course, and the committee's decisions about their pace will remain contingent on" its economic outlook as well as its assessment of the likely efficacy and costs of such purchases."

The committee also "reaffirmed" its view that a "highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens."

In keeping the federal funds rate at 0% to 0.25%, the committee "currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored."

In determining how long to maintain that highly accommodative stance, the FOMC will consider other market information and when it decides to remove the policy accommodation, it will "take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%."

Voting for the FOMC monetary policy action were: Fed 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.

Voting against the action was Esther L. George, who 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.