The Federal Open Market Committee (FOMC) Statement released last Wednesday had no major surprises. As the Fed recognized improvement in economic conditions, there are two important phrases that could influence the way credit unions manage their investment portfolios.
The FOMC noted improvement in economic conditions, but did not change the broadness of its policy. A Fed Funds target range of zero to 25bp will remain for some time. The FOMC is committed to "exceptionally low levels of the federal funds rate for an extended period." Given this strong position, it is likely that short-term interest rates will remain low for a year or longer.
With short-term rates at historical lows, investors will need to extend their portfolio to achieve meaningful yields. The Fed could be looking to drive investors to take on longer-term investments (given this stance).
The second phrase from the FOMC statement to take note- "inflation subdued for some time" – serves to calm fears of inflation. This phrase assures that the Fed believes inflation is under control. The message is that going farther out on the yield curve is a viable investment strategy.
Industry data from June 30, 2009 shows that credit union investment portfolios continue to stay short; with almost 60% of investments maturing in less than a year. Many credit unions are demonstrating they want to avoid the trap of being "long and wrong;" holding long-dated investments at historically low yields when the rate environment begins to change.
Source: Callahan's Peer-to-Peer 2.0
How will these dynamics affect your credit union's investment strategy? In order to increase yields, risk needs to be considered. There are a range of options to pursue, but understanding the market dynamics and characteristics of securities in this environment is critical.
Please join us for a conference call being hosted by Trust for Credit Unions and Goldman Sachs Asset Management "What the Fed's Policies Mean for Your Investment Portfolio".
Guest Speaker: John Olivo, VP of Goldman Sachs Asset Management
- How the Fed's Policies will influence interest rates across the yield curve in the coming months
- Strategies for optimizing your Investment Portfolio in this environment
- Trust for Credit Unions Performance Overview
The call is Thursday, October 1st, at 11:30am. Please email email@example.com for instructions to dial in.