Interest rates, the Fed and taking risks

Asset liability managementThe financial press and the stock markets have been teeing up a Federal Reserve rate hike for weeks. Headline writers and analysts have been in overdrive with a chorus of “Rate increase all but certain,” “Fed poised to raise rates for the first time in nearly a decade” and “Get ready for higher interest rates.”

Will it happen this time? We’ll know tomorrow afternoon when the Federal Open Market Committee makes its announcement. It’s a dicey business trying to predict what the Fed will do. Recall that in the weeks leading up to the FOMC’s September meeting there was a similar hue and cry about a rate increase, and the markets went crazy. It did not happen.

My hat is off to those in financial services who worry about interest rate risk and what it might do to their balance sheets. This summer, I wrote a piece for the September-October issue of The Federal Credit Union magazine on “Asset/Liability Management.” The subhead was “Making sound decisions in uncertain times.” Very appropriate, considering the challenge credit unions face in trying to navigate an uncertain rate environment.

When I wrote the piece, there was talk that rates would go up in the fall. Given the magazine’s lead time, I had to submit my article in July. So I steered away from making any hard-and-fast statements about rate increases. That turned out to be prescient because the FOMC decided to leave rates alone and kick the can down the road.

A quote from economist Edward de Bono for the article neatly summarized the task at hand: “If you cannot accurately predict the future, then you must flexibly be prepared to deal with various possible futures.” That, in a nutshell, is the job of asset/liability committees and credit union risk managers.

The chief financial officers I interviewed were unanimous in stating that it would be foolish to try to predict what the Fed will do. Besides, interest rate risk is only one of many risks that can erode your capital. Just as serious, perhaps even more so, is liquidity risk, not to mention credit risk.

As any successful business leader will tell you, there will always be risk. If you’re too afraid of it, you’ll end up making shortsighted decisions that limit your opportunities. Healthy organizations recognize that some level of risk is acceptable in order to accomplish goals and grow.

Entrepreneur and amateur race-car driver Tom Panaggio makes these two points about risk and leadership on Skip Prichard’s Leadership Insights blog that are worth remembering:

There are two big advantages to risk.

First and foremost, risk is directly connected to opportunity. Every opportunity must have an element of risk or there will be no benefit. Risk is the cost of opportunity. All businesses and organizations must be in a constant state of forward progress because of competition and the ever-changing demands of customers… A leader who recognizes the vast importance of forward motion for their organization accepts risk as merely a cost of opportunity and then actively endorses this philosophy throughout his business in setting the stage for long-term success.

Secondly, because most people have a tendency to avoid or minimize risk, those who have the courage to embrace it already have a competitive advantage. For example, my company was a nonstop marketer. We knew that our competition was not willing to risk the investment in marketing to the degree that we were. So we took advantage of their unwillingness to risk the marketing dollars and dominated our market space by out-marketing them. We put ourselves in a position to win by embracing the risk of marketing.

I personally am ready for the Fed to bite the bullet and get this interest rate hike over. Never has there been so much angst over 25 or 30 basis points, or whatever it will be in the end. Let’s just do it and get going with that Santa Claus rally!

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