The Fed’s decision to raise its target overnight lending rate to 1.25%
means that yields on money market shares, certificates of deposit, credit card
rates and other accounts will rise. The same is true for the yield credit unions
are receiving on the $56.2 billion in cash and cash equivalents they hold as
short-term investments.
With the rate increase, credit unions should see an additional $70.3 million
in investment income in the second half of the year from their short-term investments.
Since cash and cash equivalents make up approximately 25% of the entire credit
union investment portfolio, the overall investment yield for credit unions should
grow just over 6 basis points. As stated previously, the Fed’s move will
affect all interest rates, however for this article we are focusing solely on
the increase in income from short-term investments that we estimate will move
from a 1.00% yield to a 1.25% yield.
Below is the entire credit union investment portfolio, which totaled $223 billion
at 3/31/04.