Good news for economy can mean challenges for rate risk: NCUA

October 1, 2014

ALEXANDRIA, Va. (10/2/14)--A solid second quarter for the U.S. economy has been good news for credit unions, but a change in interest rates could prove challenging, said National Credit Union Administration Chief Economist John Worth in the agency's latest economic update video.

This month's video features Worth discussing recent economic data and Federal Reserve statements about monetary policy and what it would mean for credit unions.

"Our chief concern is that credit unions be aware and prepared for the possibility of rising short-term rates," Worth said. "Credit unions should have a firm idea of how their income statements and balance sheets are affected by a rapid rise in short-term rates."

Worth cited the Federal Open Market Committee (FOMC), which stated that in the likely event the economy continues to improve into 2015, short-term interest rates are likely to rise.

"The federal funds rate that policymakers feel will be appropriate, given the improving economy, is about 1.25% at the end of 2015, nearly 3% at the end of 2016 and more than 3.5% at the end of 2017," he said. "It's important to note that [Federal Reserve] Chair [Janet] Yellen, speaking for the FOMC, continues to emphasize that policy is data-driven. That is, if the economy improves more quickly than expected, rate hikes could come more quickly and be larger."

The NCUA encourages credit unions to explore the agency's interest-rate risk resource Web page to better understand the risk those changes present.

Use the resource links below to access the video and the NCUA's interest-rate risk Web page.

NCUA Economic Update: October 2014

NCUA interest rate risk resources