CUs Must Prepare for Rising Interest Rates, says Berkeley Professor

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It’s a central banker’s worst nightmare. The economy is stagnating with a weak labor market, yet inflationary pressures are building.

That is the position the U.S. finds itself in right now as high energy and food prices push up the consumer price index. Most at the Federal Reserve, including Chairman Ben Bernanke, insist that this trend is transitory and that economic growth and employment will improve during the second half of the year.

Is this hypothesis based on some insight into future Fed policy? Or is it based on a deep understanding of recessions and recoveries from the vaunted economist years at Princeton studying the Great Depression?

It seems unlikely that the Fed can do too much more to stimulate growth. Indeed, Bernanke stated as much, explaining to a Congressional panel, “Monetary policy (i.e., interest rate setting) cannot be a panacea.”

In such an environment, how can credit unions plan for the future? Will interest rates remain low in the face of inflationary pressures? And when might they rise?

“Since the Fed is so convinced that oil and other commodity prices won’t rise much and that unemployment won’t fall much, interest rates are likely to stay low for another year,” said James Wilcox, the J.J. and M.B. Lowery Professor of Financial Institutions at the Haas School of Business, who will speak on the matter at the Volunteers Conference. “Eventually, the economy will strengthen enough to require the Fed to raise rates. And, when that time comes, unlike under Greenspan, Bernanke and company are likely to raise rates vigorously.”

Being prepared for rising interest rates is particularly important these days because credit unions have been handing out loans with incredibly low rates. If interest rates rise too quickly and they are unprepared, it is possible some could be caught between a vice of high costs and low income with bad consequences.

“Thus, credit unions should plan and act now on the prospects for distant, but rapid, rate rises,” added Wilcox.

To learn more about this topic, register for the Volunteers Conference in Bend, Ore.


Questions?  Contact Training Programs Coordinator Yuri Jung: 206.340.4817,

Posted in Compliance News, Economy.