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Economist Urges CUs to Assess Impact of Impending QE Tapering

by Ken Anderson | Sep 11, 2013
Managing financial institutions in general, and credit unions in particular, has been a challenge in these turbulent times, and the challenge is likely to get tougher

Managing financial institutions in general, and credit unions in particular, has been a challenge in these turbulent times, and the challenge is likely to get tougher.  Assuming that the U.S. economy is getting back on track to more normal self-sustaining growth, Federal Reserve policy makers are preparing to unwind their unconventional monetary policy (UMP), a move that credit unions will need to assess closely, says Dr. Ed Yardeni, economist, consultant and ardent Fed watcher for the past 33 years.

According to Yardeni, President of Yardeni Research, an investment strategy consultancy based in Brookville, New York, “The Federal Reserve has implemented an extraordinarily unconventional monetary policy since the financial crisis started in late 2008. The federal funds rate was lowered to near zero at the end of that year and remains ‘zero-bound’ today.   In addition, a series of bond buying programs, collectively known as quantitative easing (QE), has been instituted to lower longer-term rates. The Fed has also provided so-called ‘forward guidance’ about the outlook for the federal funds rate, including linking it to the unemployment and inflation rates. These programs pushed bond yields to historic lows, but both yield curve and credit spreads have been widening in recent months.”

“Financial institutions need to assess not only the outlook for the federal funds rate, but also how the bond and mortgage markets will respond to the Fed’s eventual tapering of QE and its ongoing forward guidance,” said Yardeni.  He adds, “Assessing these developments is bound to be especially tricky given the leadership transition at the Fed and the new composition of the Federal Open Market Committee.” Yardeni is referring to the completion of Fed Chairman Ben Bernanke’s term as chairman of the Federal Reserve and the rotation of new members onto the FOMC in early 2014.

What does this easing mean for consumer credit?  According to Yardeni, if the Fed does phase out QE by the middle of next year, as Fed Chairman Ben Bernanke has suggested, it will be because the U.S. economy is continuing to improve.  More specifically, the unemployment rate would most likely be down to seven percent in this scenario.  “The good news for credit unions is that the quality of their consumer loan portfolios would improve significantly as delinquencies continue to decline.  The not-so-good news is that competition will heat up among financial institutions to lend to consumers,” said Yardeni.

Yardeni has been following and forecasting the Fed for investors since working at the Federal Reserve Bank of New York in the late 1970s, under Paul Volcker.  Scheduled to speak at Catalyst Corporate Federal Credit Union’s 36th annual Economic Forum, Oct. 22-23 in Frisco, Texas, Yardeni will provide a framework for assessing the likely course of Fed policy and interest rates over the next 12-18 months.  He will also discuss the projected course of the U.S. economy, providing a longer-term perspective and focus on the opportunities and risks that credit unions face.  Special attention will also be given to the housing market and the potential that exists for the development of new financial bubbles.

Joining Yardeni at this year’s Economic Forum–entitled “Recovery and Beyond” –will be a strong slate of economists and financial industry experts who will focus on critical issues facing credit unions in the next 12 months and in the coming decade.  Preceding the Economic Forum on Oct. 21 will be Catalyst Strategic Solutions’ Financial Management Seminar, an intensely-focused one-day event that offers credit unions specific strategies for managing balance sheets in a challenging economy.  Details, including registration information for both events, can be found online at