August 26, 2008

Coordinating Moves of the Central Banks

By Bruce Six, Senior Vice President - ALM

Last week the collective “experts” in economics and central banking met in Jackson Hole, Wyoming to discuss their take on the economy of their respective countries and the world economy as a whole. First organized in 1982 by the Kansas City FRB, this meeting is annually one of the most anticipated and watched gatherings for insight into how the world economies are linked and what the large central banks are positioning themselves to weather. The conference participants, including Fed Chairman Ben Bernanke; European Central Bank (ECB) Chairman Jean-Claude Trichet, almost summarily agreed that the current market troubles and credit dislocation will not be ending any time soon. Instead much of the discussion centered on the roll central banks should take and responsibility they have for maintaining financial stability. The shape of future financial regulation and the need for additional, comprehensive supervision of systemic risk and requirements for higher levels of capital and additional liquidity were all discussed. As is typical of these highly publicized meetings more questions were raised than answers found but the take away has widely been reported as additional regulation will be coming our way and requirements for capital and liquidity will be increased.

The current rate forecast by the market place has the Fed on hold at 2.00% through the end of 2008 and then starting to increase rates later in the first quarter of 2009. This represents a continued shift from last months projection that Fed would be raising rates as early as the next meeting on September 16. Even as the market keeps looking at the next move by the Fed to be higher, many economist make some very compelling arguments that as the cost of gas and food take disposable income out of the US economy and the economies of Japan and Europe falter the Fed may be able to relax it’s concern about inflation and continue trying to stimulate the economy by keeping rates down. Since we don’t know where rates will go in the future the most appropriate portfolio strategy could very well be the all too simple but effective ladder. By keeping investments rolling out 12 to 18 months the credit union is in a good position to react when we do get a clearer direction of future rate moves. Remember to watch the shape of the yield curve to get an idea where the markets think rates will be going.

On the balance sheet, be careful not to try and chase the 0.0% auto offers the manufacturers have brought back to the market. Bringing very low rate auto assets on the books for what is usually an average of 30 to 36 months could become a drag on earning if rates move higher. Look to investment alternatives with a shorter term instead or aggressively price used auto rates where there is less competition and better collateral.