FED Links Interest Rates To Employment Improvement

December 13, 2012 at 7:40 am Leave a comment

imagesIf you’re in a credit union that is mandated to have a Interest-Rate Risk policy, or simply feel that it is foolish to run a financial institution without one, your job just got easier yesterday thanks to the Federal Reserve.  At its last meeting this year of its Open Market Committee, Chairman Bernanke explicitly tied an increase in the federal funds rate , which determines interest rates, to a drop in the unemployment rate to at least 6.5%.  This marks the first time that the Federal Reserve has ever linked interest rates to a specific unemployment rate.  This is a further move by the FED to demystify its policymaking in the hopes that doing so will help foster economic growth by creating more certainty in the market place.  These projections would be subject to change if the FED saw a sudden spike in inflation, but clearly the FED doesn’t see inflation going anywhere near 2.5% anytime soon.

The other big takeaway is that, as expected, the FED further increased its asset buying program with the explicit goal of keeping down long term interest rates.  But since the FED is going to continue this program without selling off shorter term securities to pay for the purchases, the FED is going to be printing even more money to bank roll its interest rate subsidy.  However, in a press conference, the FED Chairman stressed that unlike an increase in interest rates, which is now tied to a specific number, the continuation of the asset buying binge is predicated on a continuing analysis of its overall effectiveness.  In other words, the former professor who does about as good a job as anyone I’ve ever heard of explaining economic policy, is at least open to the argument that the FED’s asset buying policy may reach a point of diminishing returns.

So, if your examiner feels that your assumptions on interest rates over the next year are too low, tell him to complain to Chairman Bernanke.

Entry filed under: Economy, Regulatory. 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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