The Real Interest Rate Risk To Credit Unions
I’m feeling a little bit like Nostradamus this morning before Fed Chairman Ben Bernanke gives his semi-annual assessment of the U.S. economy to Congress today. Here’s what Nostradamus has to say.
This is the most important presentation to be given by the Chairman in quite some time. For years now federal regulators have been harping about the dangers imposed by a sudden rise in interest rates, a fear exacerbated by the Fed’s decision to buy $85 billion of mortgage- and treasury-backed securities each month in order to keep mortgage rates artificially low (by the way, as someone looking for a house right now, Nostradamus says thank you!). Still, the most extreme concerns of a sudden rise in interest rates caused by a reheated economy are kind of like my prediction about the end of the world. Some day I will be right, but in the meantime let’s get on with the business of banking.
In reality the only plausible scenario for an interest rate spike, at least any time soon, would involve a mismanaged exit from the FED’s bond buying program. This is one you don’t have to take my word for. In his speech the other day, William Dudley, the Chairman of the Federal Reserve Bank of New York, noted “There is a risk is that market participants could overreact to any move in the process of normalization. Indeed, there is some risk that market participants could overreact even before normalization begins, when the pace of purchases is adjusted but the level of accommodation is still increasing month by month.”
This is why Big Ben’s testimony is so important today. The question is no longer just when the FED will ease its bond-buying program but how exactly it will disentangle itself from the bond market without leaving a sudden spike in its wake as investors seek to calibrate the after effects of the FED’s bond buying binge. His task is not an easy one. He will never advocate prematurely ending the program and as of right now, not even Nostradamus knows what impact budget negotiations will have on future economic growth. Conversely, an increasing number of Federal Reserve Board Members are open to considering that now may be the time to begin slowing down this period of quantitative easing. Nostradamus predicts that the Chairman will emphasize the continued economic uncertainty — let’s not forget the economy is still sluggish, to put it euphemistically – and make it clear that he will be one of the last people to advocate an end to the Fed’s current policies. This approach gives him the flexibility he needs to respond to unexpected improvements in growth while minimizing the chance that his mere words will cause interest rates to rise.
By the way, Nostradamus also predicts that disgraced former Queens Congressman Anthony Weiner will enter the race for New York Mayor. Actually this isn’t a prediction at all, his video announcement is all over today’s papers. I have no way of knowing whether or not he’d make a good or bad mayor, but when did we become such a forgiving society that a complete abdication of personal responsibility, accountability and self-respect doesn’t disqualify you from public office? People love to say that politicians are cynical, maybe it’s the people who are too cynical for electing politicians who feel they can get away with anything so long as they publicly apologize.
Have a nice day.