January 27, 2010

Too Cold to Buy?

By Amanda Parsons - ALM Specialist

Two weeks ago I mentioned it might be too cold to work, and this week it looks as if it was also too cold to go house-hunting in December. The unusually bad weather is most likely to blame for both the 4.0% drop in housing starts and the 16.7% drop in existing home sales. Conversely, building permits increased by 10.9%, signaling that builders foresee an increase in future home sales. The new home sales numbers come out Wednesday this week; we will look to see if the data is consistent with a cold weather drop in sales across the board.

Also on Wednesday, the Federal Open Market Committee (FOMC) concludes their two-day meeting and
releases a statement, including the target federal funds rate decision. Though the markets
do not expect a rate change at this time, we will be carefully analyzing any changes in the statement
from the last meeting statement. Depending on what language the FOMC uses, it could signal a plan to
raise rates sooner than generally expected. Alternatively, as in recent months, there could be no change
to the wording of the rate language in the statement.

Given the mixed data recently, what scenario is your credit union planning for? Currently the markets expect
rates to increase beginning in the fourth quarter, but there are two other options worth considering. Rates
could potentially stay low into 2011. Keep in mind many of you have lowered loan rates to stay competitive
in the current market. How long can you afford to continue granting loans at your new low rates? Rates could also
rise sooner than expected if the FOMC sees economic improvements that are more drastic than gradual. Are you
able to raise rates before the FOMC does?

We like to look at all potential scenarios when we're helping credit unions analyze their balance sheets.
If you'd like help, please contact your Corporate Account Manager at 1-800-622-7494, or contact me directly at
the same number, extension 3265, or aparsons@midatlanticcorp.org