The Latest From the FED’s Crystal Ball

May 8, 2014 at 8:30 am Leave a comment

Yesterday, Federal Reserve Chairman Janet Yellen testified before Congress’s Joint Economics Committee.  Here are some quick takeaways for your credit union to keep in mind as it looks over the horizon.

My guess is that your examiner is more concerned about interest rate risk than Chairman Yellen.  She took pains to stress that even though the FED is on course to end its quantitative easing bond buying binge some time in the Fall, don’t expect it to start raising interest rates as a matter of course.  Why?  Because even though the economy is improving, it’s by no means booming and there are plenty of warning signs on the horizon.

Most notably, the FED is seeing signs of a flattening housing market.  In addition, even though the unemployment rate is dropping, that number alone doesn’t provide a full picture of how bad it still is out there for people looking for work.  She pointed out that the number of long term unemployed remains at historically high levels and that the number of people settling for part-time employment is also skewing the economic picture.  If Yellen has her way, you won’t see the FED taking steps to push up long term interest rates until economic growth is clearly on solid ground and she clearly doesn’t think we’re there yet.  Plus, the economy is so weak that she doesn’t see inflation creeping up over 2% any time soon.

A contrary view of the state of the economy and what the FEDs should do about it was provided in an op ed piece in yesterday’s Wall Street Journal, no doubt timed to coincide with Yellen’s appearance.  In it, Carnegie Mellon professor Allan H. Meltzer argues that the FED is ignoring warning signs of inflation — he points to rising food prices — and also that “never in history has a country that financed big deficits with large amounts of central bank money avoided inflation.  Yet, the U.S. has been printing money — and in a reckless fashion — for years.”  Yellen was repeatedly asked about this critique and she agrees that long term deficits are a danger that Congress should deal with but she parts company with the inflation hawks in two important areas.  First, critics of the FED’s quantitative easing program have always argued that it will eventually result in a surge or inflation s the FED reduces its huge number of purchases.  Yellen was emphatic that the FED has the determination and the tools to keep inflation under control.  Secondly,  she disagrees with the extent to which the current state of the economy presents inflation risk that the FED has to address immediately.  For your credit unions, that means that you will continue to search for yield as your examiners continue to warn against interest rate hikes.  Eventually, they will be right.  But let’s hope that credit unions don’t have to leave too much money on the table to address these concerns.

 

Entry filed under: Economy, General. Tags: , , , , .

Al to the rescue? Does Congress Give One Iolta About Credit Unions?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Authored By:

Henry Meier, Esq., Associate General Counsel, Credit Union Association of New York

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 323 other followers

Archives


Follow

Get every new post delivered to your Inbox.

Join 323 other followers