The answer to this question should be a minimum of 1.50%—and that’s a conservative estimate.

The Federal Reserve will continue on their path of raising short-term interest rates. At the end of last year, I predicted two rate increases totaling 50 basis points (.50%), which could be an underestimate. All indicators point to at least one-to-three more rate hikes this year and a further two-to-four rate increases of 25 basis points (.25%) each in 2018. That would boost short-term rates by 1.50% to 2.00%.

Such a rise will have implications on lending as well as what you should plan to budget on your operating and non-operating cash.

What Should You Be Budgeting for Interest Income in 2018?

The days of cash not having value are over. Cash is an asset that can add significant income to your 2018 bottom line.

On each $1 million you hold in cash you should be able to earn at least $15,000 or more over a 12-month period.

So what can you expect in 2018:

1. Some of the large banking institutions (those over $50 billion in assets) might start showing an interest in gathering public deposits. Their rates will still lag behind those of the government and corporate bond markets and will vary on whether or not to pass on the FDIC coverage costs to the entity. Though banks will not be quick in delivering the full rate increases, if you stay in close communication with your bankers they will work on your behalf to increase your deposit rates.

2. At the time this blog was published, June 6th, a one-month Treasury was yielding .88% while a one-year Treasury was hovering at 1.15%. These rates are building in a June rate hike of .25%. If there is at least four .25% rate hikes over the next 18 months, you will see one-month and one-year Treasuries in the range of 1.50% to 2.00%.

3. With proper cash flow and liquidity forecasting, as recommended at last month’s National Government Finance Officers Association (GFOA) Conference in Denver, the ability to capture the value of the Feds can be immediate, provided you are proactive.

4. Your bank’s ECR (Earning Credit Rates) should approach over 1.0% in 2018, meaning fewer dollars will be needed to cover banking fees. As in point 3 above, you need to communicate with your banks and proactively pursue better rates, even if you had a committed rate through a banking RFP.

5. Put a time horizon on your cash and know what the marketplace value is for your cash, including time deposits, state pools, bank CDs, Treasuries, government bonds and—where permitted by investment policy and required legal guidelines—money market funds, high investment grade commercial paper, and corporate bonds.

You have an opportunity to make your cash a significant differential to your 2018 budget.

If you need some guidance going forward, three+one can help. We are the leading independent liquidity analysis firm in the country. We put the interests of public entities and higher Ed institutions first. Call us and we can help you put a time horizon on your funds and a marketplace value that you can apply in developing your 2018 budget.

We’re only a phone call away.

See Us At These Upcoming Events and Conferences:
Ohio GFOA – September
GFOA SC – October
PA GFOA – October