March 15, 2010

When are Rates Going Up?

By Amanda Parsons - ALM Specialist

On March 16, the Federal Open Market Committee meets to decide the target Federal Funds rate. In the FOMC statement, look for changes in the wording-does it still state the expectations of “exceptionally low” rates for “an extended period?” If this language changes, we may be looking at a rate increase sooner than expected.

All 52 economists surveyed by Bloomberg News last week expect rates to remain unchanged this month.
Only 4 out of 52 surveyed expect rates to increase by the end of the second quarter. The chart below
shows the average forecast plus selected institutional forecasts to show how widely the forecasts vary.
By this time next year, will the target rate still be the same? Will it jump to 2.00%?

Since rates are still low and may not be going up anytime soon, many credit unions are lengthening their
investment portfolios in order to increase yield. Purchases of one- to two-year certificates and securities may
make sense for your credit union depending on your loan demand and expected liquidity needs. Keep in mind that
going long now poses an increased interest rate risk. If you have the ability to model “what-if” scenarios through
your ALM provider, now is a great time to do so. Some providers allow you to test out what would happen
to your balance sheet in rate-shocked environments if you buy a new security.

If you have any questions about this or other balance sheet-related issues, contact me directly at
1-800-622-7494, extension 3265, or aparsons@midatlanticcorp.org, or you may call your Corporate
Account Manager at the same number.