Fed Boosts Short-Term BenchmarkAgain

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WASHINGTON - (05/11/06) – The Federal Reserve raisedshort-term interest rates for the 16th time in a row Wednesday,boosting the target rate for overnight FedFunds to a five-year highof 5%. Credit union observers were expecting additional rate hikes,too. “I don’t think this is the last one,” TunWai, chief economist for NAFCU, told The Credit Union Journal. Hepointed to the Fed’s statement after Wednesday’saction, as well as rising inflation and economic growth, which theFed has sought to tamper. The rising short-term rates, coupled withlong-term rates that have barely moved–creating a so-calledinverted yield curve–has been problematic for credit unions,said Wai. That’s because credit unions have been forced toraise the rates they pay on CDs and other savings products, whilewaiting until loans mature to raise those rates. The result hasbeen a squeeze on the bottom line. He predicted a continued slumpin credit union profitability–return-on-average assets, orROAs, as a consequence.

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