WASHINGTON — In a move to restore order to the financial markets, the Federal Reserve Board approved a temporary 50-basis point decrease in discount window borrowing.
On Friday, Aug. 17, the Fed dropped the primary credit rate for its discount window to 5.75% as well as allowing the Reserve Banks to offer financing 30 days out that is renewable by the borrower. "These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially. These changes are designed to provide depositories with greater assurance about the cost and availability of funding. The Federal Reserve will continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets," a statement read.
This change followed an Aug. 10 increase of liquidity pumped into the markets after the Federal Open Market Committee maintained its target rate at 5.25% during its Aug. 7 meeting. The FOMC also released a statement Aug. 17 stating, "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably."
NAFCU Chief Economist Tun Wai is expecting the Federal Open Market Committee to follow up with a 50-basis point reduction in the Fed funds target at or before its Sept. 18 meeting. While the concern for liquidity is not unusual, the 50 basis point move on the discount rate is atypical, he said. However, he noted that the global economy has responded positively to the change and investors appear to be calming.
"With last Friday's announcement, you didn't see a lot of the inflation language," CUNA Mutual Chief Economist Dave Colby pointed out. He also said the Fed is "breathing easier" because Hurricane Dean changed course and was no longer heading for energy producing areas; consequently, there was a drop in the price of natural gas, gasoline, and oil.
Colby concurred with Wai's forecast of a 50-basis point drop at the next FOMC meeting. He saw the Fed's actions as aiming for stability: "I think they want to take decisive action and show the Fed is ready to step in."
If the FOMC does lower rates, credit unions' already strained margins could become tighter if adjustable rate mortgages do not increase as they were formerly expected to. It could help the spread on fixed rate mortgages depending upon how quickly credit unions readjust their deposits.
However, he recommended that credit unions get more aggressive on mortgages, particularly with a possible refinancing boom on the way and the cost of good credit going down, but "closely monitor collateral values," he warned. Due to aggressive captive finance vehicle lending, Colby said he does not expect much growth there for credit unions, so mortgages are the way to go. "If anything, our portfolio is a little too pristine," he added.
As for the discount on the discount window, Colby said, "I don't think a lot of credit unions use the discount window and I don't think credit unions are experiencing the liquidity issues."
–scooke@cutimes.com
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