MADISON, Wis.–With the Federal Reserve’s announcement this week that it will likely only reduce rates once in 2024, TruStage’s chief economist has released an updated an analysis of the factors playing roles in setting rates.
Writing as part of the company’s newest Trends Report, Steve Rick reminded what many CU CFOs and ALCOs know all too well, that on March 17, 2022, the Federal Reserve embarked on its plans to reduce inflation by raising the federal funds interest rate and reducing the nation’s money supply.
‘Major Impacts’
“During the ensuing 26 months, the Federal Funds interest rate rose from
0.08% to 5.33% and the money supply fell from $21.9 trillion to $20.9
trillion today,” Rick stated. “Higher interest rates and lower money
supply has caused major impacts on credit union balance sheets and
income statements. Higher interest rates reduced the market value of
investments classified as available for sale and caused equity levels to
decline. High interest rates also reduced deposit growth as
interest-rate-sensitive members moved funds to higher-yielding money
market mutual funds which led many credits unions to borrow funds from
the wholesale market.”
Switching the Focus
In switching the focus to the income statement, Rick noted higher interest rates have boosted credit union yield on asset ratios, as loans repriced and investments matured and were reinvested into assets with higher market interest rates.
“Deposit pricing became paramount as credit unions fought to retain existing deposits and attract new deposits,” Rick explained. “These efforts greatly increased credit union cost of funds, putting downward pressure on net interest margins. Higher interest rates also increased loan delinquency rates for members with adjustable- rate loans. This boosted provision for loan losses which also put downward pressure on net income.”
The Big Question
So, when can the markets expect the Federal Reserve to ease off their current stance of tight monetary policy?
According to Rick, whose analysis was written prior to the Fed’s most recent meetings, the money supply hit its nadir in October 2023 ($20.7 trillion) and has increased by $200 billion during the last six months.
“This is easing liquidity pressure for many financial institutions,” he stated. “As for interest rates, inflation is being more persistent than many had expected. So, we expect the Federal Reserve to keep the Fed Funds rate at 5.33% until the fourth quarter and then lower interest rates at their December meeting.”
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