Low-Yield Environment Set to Continue as Fed Votes to Keep Interest Rates Near Zero
January 31, 2013
January 31, 2013
The Federal Reserve’s Federal Open Market Committee (FOMC) voted this week to continue purchasing bonds and Treasuries according to a policy established in December and to hold the federal target fund interest rate steady at near-zero levels.
At its meeting in December, the FOMC outlined a plan to purchase $85 billion in bonds each month, allocating $40 billion to mortgage-backed securities and $45 billion to long-term Treasury bonds while indicating that this policy would continue until unemployment rates have dropped significantly. It also said it would keep short-term interest rates near zero until unemployment rates fall to 6.5 percent or lower, assuming inflation forecasts remain consistent. This week’s two-day meeting was the committee’s first of the year.
“Employment has continued to expand at a moderate pace but the unemployment rate remains elevated,” the committee said in a statement. “Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.”
“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.”
Confirmation that current rates—and the accompanying low-yield environment—will continue for the foreseeable future is not exactly welcome news for credit unions, but according to Dan Hein, vice president of administration and finance for the Northwest Credit Union Association (NWCUA), credit unions can still take advantage of the plan laid out by the Federal Reserve.
“They’re showing us what’s in the crystal ball,” Hein said, explaining that the consistent rates allow credit unions to develop specific strategies to proactively address economic challenges. “We already know what the future holds, so how can we set ourselves up for the best possible return—and the best long-term return?”
Hein recommends a strategy specific to current conditions that will provide a balance between maximizing short-term yield and maintaining the flexibility necessary to capitalize on more favorable rates in the future.
“Developing a fixed-income strategy is about determining how to invest your money considering the current environment and what the current environment will lead to,” Hein said. “Once the future becomes less transparent, we need to be in a position to react effectively, because rates won’t always be so fixed. We will eventually see yields go up, which also means the opportunity to get more return, so you also don’t want to be stuck when circumstances change. Credit unions need to invest wisely now so that they can still be in a position to reinvest and continue to gain that yield.”
Questions or comments? Contact Matt Halvorson, Anthem Editor: firstname.lastname@example.org.