How Two Words can Cause Volatility in your Balance Sheet

As evidenced by last week's volatility in the capital markets after the FOMC released the minutes from its meeting, the words and tone the Fed uses in their accompanying statement generates more volatility than their actual decision. The Volatility in the market comes from Fed watchers who decipher what certain statements from the Fed mean - or don't mean. The credit union manager is left with the challenging task of incorporating changing market expectations into their forecasts and daily operations.

 

By Trust for Credit Unions Mutual Funds

 

As evidenced by last week's volatility in the capital markets after the FOMC released the minutes from its meeting, the words and tone the Fed uses in their accompanying statement generates more volatility than their actual decision. The Volatility in the market comes from Fed watchers who decipher what certain statements from the Fed mean - or don't mean. The credit union manager is left with the challenging task of incorporating changing market expectations into their forecasts and daily operations.

Last week the Fed modified their wording from earlier statements by dropping the promise to keep rates on hold for a ''considerable period'' to saying it could be ''patient'' regarding rates. The market's reaction to the new language was that rates were going higher - sooner rather than later. The Bond Market was pummeled with the price of the 2, 5 and 10-year treasuries all dropping significantly following the announcement.

Incorporating the latest economic data and statements from policy makers into your credit union's balance sheet management process is integral. The change in rates effects, the pricing of deposits, duration of loans, and can cause investments to become ''in the money''. This requires management decisions about hedging strategies, expectations regarding the elasticity of core deposits, and the outlook for investments. A highly volatile market makes the decisions even more complex.

This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.

If you are interested in contributing an article on CreditUnions.com, please contact our Callahan Media team at ads@creditunions.com or 1-800-446-7453.

 

Feb. 2, 2004


Comments

 
 
 
  • Very insightful and something that is probably overlooked in most credit unions.
    Anonymous
     
     
     
 
Advertisement