The Story Behind the Fed Funds Target Rate Announcement.

The Feds left the target rate fed funds interest rate range steady at 0% to 0.25%. This was no surprise. Perhaps more importantly, though, they announced that they will begin reducing the amount of Treasuries they have been buying to help offset the amount of debt needed to cover the government's spending spree. This could reduce demand and contribute to a rise in the 10 year Treasury rate. The 10 year rate affects mortgage, commercial, and other consumer loan rates. Diminished demand for Treasuries will drive rates upward, as rates must increase to attract investors. Some other forces that could affect demand for Treasuries:

1. With more confidence in the economy, investors may move their money out of the safety of Treasuries and into investments that provide a higher yield.
2. The government will need to issue more debt (treasuries) than at anytime in our history, increasing supply.
3. Some say that foreign investors may begin reducing their purchases of our debt, or simply would not have the capacity to purchase the trillions in debt necessary to fund the stimulus and new White House initiatives.

If the government would have to raise the interest it pays on it's debt due to increased supply and decreased demand, it would prematurely drive up borrowing costs at a time the economy appears to be on the cusp of recovery.

Did you know that the Prime Rate was as high as 21.5% in 1980? For several recent decades, a 10% Prime Rate was not unusual. Can it happen again? What if it does, or something close to it? What would happen to your credit union's financial condition? The importance of a good Asset Liability Management program cannot be stressed enough.

Also during the Fed meeting, Federal Reserve Chairman Ben Bernanke said he would be willing to serve another term. He said, 'Where else would I get a job in this economy?'