Rate Hike Will Raise Yields All Around

The Fed's rate hike last week should bring credit unions an additional $70 million in investment income from their short-term cash investments in the last half of 2004.

 
 

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.

 

 

 

July 5, 2004


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