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“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: