Insights from Catalyst

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As Painful as it May Be…Invest!

January 04, 2021

By Leah Schlangen, Investment Officer

3, 2, 1...Invest!Since March 2020, we’ve received many questions regarding the economy, market and rates. With so much economic and COVID-19 data available, it is hard to synthesize everything and come up with one conclusive answer regarding the future or what the new “normal” may be. The new normal for credit unions will vary depending on membership base, asset size and services offered.

However, one aspect of the new “normal” we must adjust to is the low interest rate environment. Ever since the Federal Reserve (Fed) dropped the overnight rate to 0-0.25 percent on March 15, they have stayed consistent with their stance that rates will remain low.   

At the Fed meeting in September, Chairman Powell stated “the Fed is not even thinking about thinking about rate hikes,” especially since the Federal Open Market Committee (FOMC) wants inflation to reach two percent or higher for an extended period of time. 

The same sentiment carried over to their meeting on December 16, as the FOMC once again pledged to keep the target range at the current level until “labor market conditions have reached levels consistent with the Committee's assessments of maximum employment, and inflation has risen to two percent and is on track to moderately exceed two percent for some time.” Furthermore, the Fed’s current Summary of Economic Projections forecasts no rate changes until sometime in 2023.

Where do we stand now?

By the end of November, the year-over-year change in the Consumer Price Index (CPI) was 1.2 percent – a far cry from the required two percent. With taxing months ahead in our recovery, it will be difficult to reach and maintain the two percent CPI – and only the Fed really knows what “extended period of time” truly means.

Long-term low rates is not the forecast credit unions want to hear. Many of you are experiencing the same high liquidity cash positions and frustrations with putting your extra liquidity back to work in this low-rate environment. According to Sam Taft, Associate Vice President of Analytics at Callahan & Associates, credit union “total share balances rose 2.4 percent quarter-over-quarter and 18.1 percent year-over-year” by the end of the third quarter.

How should credit unions respond?

One of the most effective strategies is to put extra funds to work, maintaining a solid investment ladder. Most overnight cash accounts are paying between 0.01 and 0.08 percent. The rate will likely not change until the Fed changes – and at the risk of repeating myself – that may not happen until 2023.

Time to rip the Band-Aid off…

This is when the cost of liquidity becomes essential to consider. While it may be difficult to accept a rate of 0.15 percent for two years or 0.80 percent for five years, the added interest income earned now will help improve return on assets (ROA) in the long run. By staying invested and building your ladder with maturities and cash flow, you will have funds available when rates rise. No matter the size of your portfolio, length of your investment ladder or type of investments you choose, staying invested is better than waiting it out in cash.

At this time, it is critical to move out of cash. If we’ve learned anything from past challenges, it’s that staying in cash can cost the industry millions in retained earnings – a mistake we don’t want to repeat.

Catalyst Corporate’s Brokerage Team offers a wealth of knowledge to help your credit union better position its excess liquidity for success in the year ahead. For more information, contact us today.

All securities are offered through CU Investment Solutions, LLC. The home office is located at 8500 W 110th St, Suite 650, Overland Park, KS 66210. CU Investment Solutions, LLC registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934.  CU Investment Solutions, LLC is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.