Q&A with Emily Hollis

January 24, 2011 | COMMENTS

Question: What do you think about the government’s recent quantitative easing actions?

This past November 3, the FOMC announced a new asset purchase program totaling $600 billion over an eight-month period in an effort to keep interest rates low and stimulate the economy.

However, since November 4, the yield on the 10-year note has risen as much as 80 basis points (32 percent) and the yield on the 5-year note has risen as much as 90 basis points (87percent). Over that same time period, the inflation data has continued to show a decline in prices, while the jobs data has continued to show high unemployment.

Neither the extremes nor the establishment are enthusiastic. Proponents say it’s unlikely to do much good; and those with concerns against it warn that it may ultimately lead to too much inflation, a collapse of the dollar, or a bubble in stocks or commodity prices.

By printing $600 billion to buy long-term Treasury debt, the Fed is hoping to push down long-term rates, push up stock prices, let the dollar fall and jump start the economy. The Fed can’t just cut short-term rates below zero and it appears to be unwilling to wait for Congress to come to the rescue. According to the recently released FOMC minutes, members "generally saw only small odds of deflation" and "generally agreed that the most likely outcome would be a gradual pickup in growth with slow progress toward maximum employment," but thought asset purchases were appropriate because they would "promote a stronger pace of economic recovery." FOMC members attributed "most" of the improvement in financial conditions to "investors' increasing anticipation of a further easing of monetary policy" which is somewhat worrisome given the recent back up of rates.

Most economists believe that even with this quantitative easing, unemployment will remain above 9 percent for another year and won’t fall below 6 percent until 2014. It doesn’t look good and low rates are likely here to stay, although some believe that rates might jump.

So, what if rates do jump? As we all know, no one can accurately predict interest rates and some the most talented financial minds were simply wrong in predicting credit losses. Our industry would be crippled if we were to pile on losses due to a rapid rise of interest rates on top of the credit losses that we currently face. I seriously worry that the current ALM models, due to rates being so low, are masking the true amount of interest-rate risk that is currently inherent in credit union balance sheets. So, we are cautious. But on the other hand, we need income. Our solutions are somewhat limited: we can enhance risk to a degree of tolerance; simply accept lower income; or, if willing to embrace a good amount of work and education, we can even hedge away some of the risk.

Emily Hollis, CFA, is president of ALM First Financial Advisors in Dallas, Texas. Contact Hollis at 800-752-4628 or ehollis@almfirst.com.