No one is ever going to accuse Federal Reserve Chairman Ben Bernanke of not trying; the question is: are his efforts doing any good?

September 14, 2012 at 7:28 am Leave a comment

The Federal Reserve’s Open Market Committee announced its third and even more aggressive round of quantitative easing.  Specifically, the Fed will start buying an additional $40 billion worth of agency-backed, mortgage-backed securities every month.  This is in addition to its policy of extending the average maturities of its holdings and reinvesting maturity series into additional mortgage-backed securities.  This means that at least through the end of the year, the Federal Reserve will increase its holdings of long-term securities up to about $85 billion per month. The Chairman also took pains to stress that the commitments made yesterday were open-ended and they would not end until any recovery is on solid footing.  Those of you responsible for putting together and implementing your credit union’s interest rate risk policy should review the policy statement as well as the Chairman’s press conference.

The Fed is throwing around some impressive numbers, but will it do any good?  What struck me about the post-announcement press conference was how quickly the former Ivy League professor was willing to concede that the effectiveness of the program can be mitigated by forces outside of the Fed’s control.  For example, in response to one reporter’s question he conceded that historically low interest rates are  partly offset by tighter lending standards.  In addition, he pointed out that if Congress and the President don’t avoid the fiscal cliff, the Federal Reserve doesn’t have the resources to offset the economic consequences of higher taxes and lower government spending.  Nor does he seek to exaggerate the effectiveness of the program, pointing out that most people concede that it has had a positive impact on the economy but differ as to  how much of an impact.  Ultimately, the fed is arguing that it has an obligation to aid a struggling economy even if its impact is not as great as it would like to see.

The Feds actions will hopefully spark a larger debate as to whether the benefits are outweighed by the costs to all but the largest financial institutions. Unless you believe that an economic growth spurt is around the corner, credit unions are still in the economic tunnel without much light.  A low interest rate environment with even tighter lending standards being phased-in under federal law over the next year is not exactly a recipe for robust economic growth.  Yet again, small financial institutions are being made to pay a disproportionate price to clean up the financial mess they didn’t cause.

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

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Authored By:

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

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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