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INTEREST RATE FOCUS: CUs CAN PREPARE
updated 07/08/14 10:46 AM
Three Scenarios to Watch for
The future of when and how fast interest rates will rise is impacting every credit union—and to some degree will determine the industry’s ability to meet larger objectives being plotted in the current strategic planning season.

“No one can predict the future of interest rates,” said Dwight Johnston, vice president and chief economist for the California and Nevada Credit Union Leagues. “You might get lucky and guess right, but there is no clear path, especially with rates already so low.”

Ready for Any Outcome
How does this uncertainty impact your credit union’s planning?

Johnston says that unless a credit union’s management and board have “some great insight” about rates and plan on only one outcome, they’ll have to address the impact on the balance sheet and earnings across multiple outcomes.

“You can focus on budget projections using a consensus forecast, but you’ll need knowledge of what happens under other scenarios to prepare for Plans B and C if the tide turns on rates,” he said.

While there's a consensus forecast for rates the rest of 2014 and through 2015, the arguments for an extreme outcome, whether high or low, have merit, Johnston said. He presents three possible rate scenarios using the 10-year Treasury bond.

“For the past few years the low-rate path was, quite frankly, an easy call to make. You didn’t need to spend much time examining the impact of any other outcome,” he said. “That’s not the case in the coming months.”

Three Interest Rate Scenarios
Johnston gives the following simplified arguments for each interest-rate scenario on the 10-year U.S. Treasury bond so credit unions can plan appropriately (click on the accompanying chart). Credit unions can keep this guide in mind as the months ahead unfold:

  • Scenario 1 (low-rate forecast): The economies of Europe and China stumble, slowing down the U.S. recovery to stall speed. Deflation fears keep global interest rates at, or near, historic lows.
  • Scenario 2 (consensus forecast): The economy continues a slow but sustainable recovery, and interest rates begin a slow, steady climb. Stable inflation prevents any sharp increase in rates. The Federal Reserve does not tighten rates until late 2015.
  • Scenario 3 (high-rate forecast): The economy recovers faster than the Fed recognizes. Inflation expectations rise, and the Fed is perceived as behind the curve. The bond market revolts.

Click here for Dwight Johnston's complete interest-rate forecast commentary via the DJ's Economix webpage.

 
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EXPERTS GIVE ADVICE TO CREDIT UNIONS updated 09/18/14 11:26 AM
Your Problem: Solved
Risk-based pricing (compliance), creating an operational plan (strategic planning), and making a solid value proposition (marketing) are all highlighted within the latest “Problem? Solved!” column in Credit Union Digest.

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