WASHINGTON – The Federal Reserve yesterday defied many market observers by keeping short-term interest rates unchanged.
“The Federal Reserve does not usually react to any financial market events,” said Katrin O’Connor, a senior economist for NAFCU and one of the observers who predicted the rates would not be cut. Many others were predicting another cut of 25 basis points in the target rate for Fed Funds.
Yesterday’s action kept the benchmark rate for overnight funds, a key provider of liquidity for credit unions, at 2%.
Many observers were predicting Monday the Fed would cut rates as much as 50 bps to calm the markets.
“The thing is,” said O’Connor, “it is questionable whether it [a cut] would have had any major effect. It may have created more panic in the markets.”
“This obviously doesn't do anything to curb the high cost of liquidity but it does keep it from becoming even more expensive,” Brian Turner, director of Southwest Corporate Investment Services, told credit unions in his daily commentary.
He urged credit unions to manage their cost of funds closely. “A proactive stance on share pricing, particularly non-term shares, will help to protect net interest margins. Caution should be placed on materially extending funding durations through share certificates at this time although special efforts should be placed on retaining term maturities,” said Turner.
