A strengthening U.S. economy that leads to changes in theFederal Reserve policy regarding cost of funds may mean both goodnews and bad news for America's credit unions.

The financial crisis in 2008 led the Fed to establish anunconventional monetary policy through which the Fed funds rate was lowered tonear zero in hopes of sparking an economic upswing.

In addition, a series of bond buying programs, collectivelyknown as “quantitative easing” was instituted to lower longer-termrates. The Fed's forward guidance linked the policies tounemployment and inflation rates, two economic indicators that havebegun to ease in recent months.

The programs pushed bond yields to historic lows, but both yield curve and creditspreads have begun to widen.

A resulting change in these policies in early 2014 could see asignificant upswing in credit union lending, as well as increasedcompetition for member loans, according to Ed Yardeni, economist,consultant and ardent Fed watcher for the past 33 years.

“Financial institutions need to assess not only the outlook forthe federal funds rate, but also how the bond and mortgage marketswill respond to the Fed's eventual tapering of qualitative easingand its ongoing forward guidance,” said Yardeni, president ofYardeni Research in Brookville, N.Y.

Assessing these developments is bound may be challenging, headded, given next year's expiration of Fed Chair Ben Bernanke's term and the leadership transition at the Fedand the new composition of the Federal Open Market Committee.

No matter what happens, however, the marketplace is likely tochange, Yardeni added.

“The good news for credit unions is that the quality of theirconsumer loan portfolios would improve significantly asdelinquencies continue to decline,” Yardeni said. “Thenot-so-good news is that competition will heat up among financialinstitutions to lend to consumers.”