WASHINGTON - The Federal Open Market Committee of the Federal Reserve dropped its overnight target rates by .25%, the seventh rate cut since September 2007.
In announcing the move, the FOMC said “the substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.”
Brian Turner, director of advisory services at Southwest Corporate FCU, offered some insight into what this latest action means for credit unions.
“This will lead to an increased cost of liquidity during a period of time when loan originations are sluggish. With an overnight investment rate headed for 2% and alternative two-and three-year investment alternatives approaching 4.0 to 4.2 percent, that cost approaches 210 basis points, or $21,000 per $1 million invested. Obviously for those with stronger loan demand, that associated cost is greater,” Turner said. “Credit unions are also encouraged to address their non-term share rates–especially money market rates. Over the past few years, margins were enhanced as shares rates increased only a fraction of the market’s overall increase. That advantage, however, now limits the degree by which many can marginally drop their rates as short-term market rates have declined more than 325 basis points since last September.”
Among the points the FOMC made when it announced the latest rate cut:
* “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.”
* “The committee expects inflation to moderate in coming quarters, reflecting the projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.”
In a related action, the Board of Governors approved a 25-basis-point decrease in the discount rate to 2.25%.
