A Look at What Higher Fed Funds Rate Has Meant for CU Lending, According to TruStage Economist "Steven Rick"

04/09/2024 07:28 pm

MADISON, Wis.–While some on Wall Street are backing off forecasts that the Fed will cut rates three times this year—with some even predicting it may not cut rates at all—TruStage Chief Economist Steve Rick said he still expects the Federal Reserve will lower the Fed Funds rate this summer as inflation approaches its 2% inflation target.

“So, what impact did this higher Fed Funds interest rate have on credit union lending over the last two years?” asked Rick in his analysis released as part of the company’s newest Trends Report. “Historically, a rising Fed Funds interest rate slows credit union loan growth, holding all other factors constant. There have been three other Fed hiking cycles since 1999. Every time, credit union lending fell from around an 11% seasonally-adjusted annualized growth rate at the start of the hiking cycle to around 7% at the end of the hiking cycle, with about an 18-month lag from the beginning of the hiking cycle until credit union lending began to slow. This lending slowdown is one of the ‘long and variable lags of monetary policy’ that Fed Chairman Jerome Powell likes to reference.”

Mark Twain’s View on Lending

Quoting Mark Twain’s observation that “History doesn’t repeat itself, but it does rhyme,” Rick noted that credit unions reported a seasonally-adjusted annualized loan growth rate of only 5.3% in January 2024, down from the 19.5% reported 18 months earlier in July 2022.

“So, it appears history does rhyme. We expect credit union lending to continue to slow throughout 2024, with loan growth coming down to only 4% this year,” he wrote.