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Federal Reserve May Have to Think Beyond MBS Sales, Says CUNA Economist

ATLANTA -- A rise in interest rates could be the unwanted consequence of the Federal Reserve selling mortgage-backed securities to pull the nation into a recovery.

By Michelle A. Samaad | Updated on June 09, 2009

ATLANTA — A rise in interest rates could be the unwanted consequence of the Federal Reserve selling mortgage-backed securities to pull the nation into a recovery.CUNA Senior Economist Steven Rick said that as of last year, the Fed had $800 billion on its balance sheets, the total number of the credit union industry’s assets, speaking to attendees at the Georgia Central Credit Union Economic Symposium at the Ritz-Carlton Hotel here.“For years, the Fed operated under ‘one tool, one target’ and wanting to control inflation at 2%. Alan Greenspan did a good job controlling interest rates,” Rick said. “If we can have price stability, we can have economic growth. But that doesn’t stop asset bubbles or credit bubbles.”Going forward, the Fed’s policy of “quantitative easing” or buying debt to increase economic growth may have to be expanded to account for other factors. As a result, Rick said banks and credit unions may see more regulations.Parts of the shadow banking system and sellers of asset-backed securities collapsed when Lehman Brothers fell last year. Banks are now using their own balance sheets for funding, which has set up a competitive environment where they are aggressively competing with credit unions for deposits, Rick said.“The good news is the savings rate is going up, so there may be enough [deposits] to go around,” Rick said.–[email protected]

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