Federal Reserve Chair Janet Yellen indicated last week that the central bank would be taking its foot off the gas a bit, given that the U.S. economy is operating close to its objectives. However, one aspect of the Fed’s policy is still on track—its plan to increase interest rates at least two more times this year.
Yellen said that the Fed is planning to ease up on its support for the economy, gradually reducing its bond purchases. “The appropriate stance of policy now is closer to, let me call it neutral,” Yellen said.
Nevertheless, two additional rate hikes are still expected for 2017. Yellen said that gradual interest rate increases will get the economy to where it needs to be. However, she said that it’s also important to avoid raising rates too quickly or too slowly.
Since rates are on the rise—regardless of how fast those increases happen—treasurers would be wise to revisit their rate hedging strategy. A new AFP Treasury in Practice Guide, underwritten by Chatham Financial, provides corporate treasury teams with the tools they need to implement a rate hedging program. The guide looks at the changing interest rate environment, as well as the challenges practitioners could face when working to get a hedging program off the ground.
Although a rising rate environment has been looming for some time now, interest rate risk management has largely been something companies have kept on the backburner. “Not only is rate hedging something companies haven’t done in a while, it’s not something they would do every single day. It’s not a monthly activity or even an annual activity,” explained Amol Dhargalkar, managing director for Chatham Financial.
This was reflected in the 2017 AFP Risk Survey, in which interest rates ranked fourth on the list of key risk factors that financial professionals believe will have the greatest impact on their organizations’ earnings in the next three years. Fully 26 percent of respondents named interest rates as a risk factor—three percentage points higher than a year earlier, when they ranked sixth. But even with that slight increase, generally, it’s still not high on the priority list due to the infrequent activity on the part of the Federal Reserve—until now.
With rates on the rise, treasury practitioners need to begin putting together a strategy so that they’re not caught off guard. If your organization doesn’t have a hedging program in place, the time to begin implementing one is now. Waiting any longer could severely hinder your bottom line in this new environment. Fortunately, AFP’s new guide here to help.
Download Implementing an Interest Rate Hedging Program here.