The NAFCU Journal January - February 2018 - 30

INTEREST RATES AND
THE YIELD CURVE
At the time the CUEG panelists were
interviewed, the Trump administration
was still deliberating over the next Federal Reserve chair. Within that context,
everyone anticipated between one and
three rate hikes.
"The main dilemma that I have in predicting this is that the FOMC [Federal
Open Market Committee] members
are saying that they will hike multiple
times, but their favored inflation measurement (core personal consumption
expenditures) has been consistently
under their 2 percent target for five
years," Michigan's Walby said. "In other
words, their talk is at odds with the
data. It has been about eight years since
the last recession. I am guessing that the
economy will slow and limit Fed rate
hikes in 2018."
The majority predicted two quarter-point
rate hikes during the year. "That is based
in part on a belief that inflation will
continue to fall short of the Fed's target.
If that is correct, it will become more
difficult for the Fed to continue to argue

that weak inflation is merely transitory.
Of course, if a more hawkish candidate is
chosen to lead the Fed, then all bets are
off," Long said.
With the Fed recently lowering its
long-run forecast for the federal funds
rate, some have speculated that low
interest rates are a permanent fixture
in the economy.
Eisel is among them. "I believe 'lower
for longer' is the new normal," he said.
"We have a significant number of baby
boomers leaving the workforce every
day; combine that with lower birth rates,
and we see our labor force declining.
Add to this worker productivity that
has continued to slow versus previous
decades. Right now, productivity has
been hanging around 1 percent, and I am
not sure how this improves quickly.
"For credit unions, waiting for significantly higher rates may be a futile
exercise," he continued. "We may be in
this slow-growth, low-rate environment
for many more years to come. And
we've experienced an incredible run of
economic expansion post-crisis, so the

question many ask is, What about the
next recession? I'm not sure when this
happens, but it will eventually, at which
time GDP, along with rates, can only
head lower."
Long also is coming around to this new
normal. "As each year passes with growth
mired at 2 to 2.5 percent, and inflation
consistently undershooting the Fed's target despite the fact that unemployment
is so low, the evidence is building to support such a hypothesis," he said. "Some
corners of the industry have thrived in
spite of these conditions, but if they persist, it would mean permanently narrow
rate spreads, which would be particularly
problematic for small credit unions."
Others aren't so sure long-term interest
rates will remain lower than historical
averages should the structural influences
that caused them to fall begin to change.
"After the financial crisis, the Fed told
us exactly what they would do: pump
money into the financial system through
traditional and nontraditional means to
encourage borrowing and taking other
forms of risk. Down went rates and up
went financial markets," explained Scott
Knapp, director of investment strategy
at CUNA Mutual Group in Madison,
Wis. "Now the Fed is more cryptic in
its pronouncements, but its intentions
are directionally clear: raise short-term
interest rates and shrink the balance
sheet. No one knows how markets will
react to policy changes or if economic
growth rates will support the Fed's goals.
But given its guidance, it is reasonable
to expect modestly higher interest rates
across the curve."
Speaking of curves, the yield curve is
not expected to steepen significantly; it
could even flatten at various points in the
coming year.
Knapp predicts the yield curve will
likely shift modestly higher in a more
parallel fashion than credit unions
would like. Even so, some net interest
margin improvement is likely on its
way, he maintains.

30

THE NAFCU JOURNAL JANUARY-FEBRUARY 2018



Table of Contents for the Digital Edition of The NAFCU Journal January - February 2018

Conferences
From the Chair
Advocacy Snapshot
Washington and Industry Briefs
Growth Strategies
Stepping Into the Future
A Clear Path Forward
Economic Outlook: It’s Complicated
NAFCU 2018 Vendor Directory
Executive Spotlight
Management Insight
Compliance Central
Inside NAFCU Services
From the President’s Desk
The NAFCU Journal January - February 2018 - Cover1
The NAFCU Journal January - February 2018 - Cover2
The NAFCU Journal January - February 2018 - 1
The NAFCU Journal January - February 2018 - 2
The NAFCU Journal January - February 2018 - Conferences
The NAFCU Journal January - February 2018 - From the Chair
The NAFCU Journal January - February 2018 - 5
The NAFCU Journal January - February 2018 - Advocacy Snapshot
The NAFCU Journal January - February 2018 - 7
The NAFCU Journal January - February 2018 - Washington and Industry Briefs
The NAFCU Journal January - February 2018 - 9
The NAFCU Journal January - February 2018 - 10
The NAFCU Journal January - February 2018 - 11
The NAFCU Journal January - February 2018 - 12
The NAFCU Journal January - February 2018 - 13
The NAFCU Journal January - February 2018 - 14
The NAFCU Journal January - February 2018 - 15
The NAFCU Journal January - February 2018 - Growth Strategies
The NAFCU Journal January - February 2018 - 17
The NAFCU Journal January - February 2018 - Stepping Into the Future
The NAFCU Journal January - February 2018 - 19
The NAFCU Journal January - February 2018 - 20
The NAFCU Journal January - February 2018 - 21
The NAFCU Journal January - February 2018 - A Clear Path Forward
The NAFCU Journal January - February 2018 - 23
The NAFCU Journal January - February 2018 - 24
The NAFCU Journal January - February 2018 - 25
The NAFCU Journal January - February 2018 - Economic Outlook: It’s Complicated
The NAFCU Journal January - February 2018 - 27
The NAFCU Journal January - February 2018 - 28
The NAFCU Journal January - February 2018 - 29
The NAFCU Journal January - February 2018 - 30
The NAFCU Journal January - February 2018 - 31
The NAFCU Journal January - February 2018 - 32
The NAFCU Journal January - February 2018 - 33
The NAFCU Journal January - February 2018 - 34
The NAFCU Journal January - February 2018 - NAFCU 2018 Vendor Directory
The NAFCU Journal January - February 2018 - 36
The NAFCU Journal January - February 2018 - 37
The NAFCU Journal January - February 2018 - 38
The NAFCU Journal January - February 2018 - 39
The NAFCU Journal January - February 2018 - 40
The NAFCU Journal January - February 2018 - 41
The NAFCU Journal January - February 2018 - 42
The NAFCU Journal January - February 2018 - 43
The NAFCU Journal January - February 2018 - 44
The NAFCU Journal January - February 2018 - 45
The NAFCU Journal January - February 2018 - 46
The NAFCU Journal January - February 2018 - 47
The NAFCU Journal January - February 2018 - 48
The NAFCU Journal January - February 2018 - 49
The NAFCU Journal January - February 2018 - 50
The NAFCU Journal January - February 2018 - 51
The NAFCU Journal January - February 2018 - Executive Spotlight
The NAFCU Journal January - February 2018 - 53
The NAFCU Journal January - February 2018 - Management Insight
The NAFCU Journal January - February 2018 - 55
The NAFCU Journal January - February 2018 - Compliance Central
The NAFCU Journal January - February 2018 - 57
The NAFCU Journal January - February 2018 - Inside NAFCU Services
The NAFCU Journal January - February 2018 - 59
The NAFCU Journal January - February 2018 - From the President’s Desk
The NAFCU Journal January - February 2018 - Cover3
The NAFCU Journal January - February 2018 - Cover4
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