Fed Interest Rate Hike a Welcome Sign for Credit Unions
The Federal Reserve’s decision to increase its key interest rate by a quarter point is a bit of good news for credit unions, economists said Thursday.
And the expectation that the Fed will boost rates again this year is even better news, they said.
"The immediate impact of a quarter-point rate increase is pretty small,” said NAFCU Chief Economist Curt Long.” “But the big picture view is that the Fed appears to be ramping up the pace of normalization. That would benefit most credit unions, particularly small ones who are operating under thin margins due to the increase in regulatory burden."
That view was echoed by Perc Pineda, CUNA’s senior economist.
“This should be good for credit unions’ bottom line and consumers as rates on savings will eventually rise,” he said.
He added that CUNA economists expect two more increases this year.
“The modest increases in market interest rates will help keep consumers in a buying and borrowing mood and we continue to believe that credit unions will collectively post double-digit loan growth in the year,” Pineda said.
Although the interest rate hike was relatively small, it will have an impact on credit union Return on Assets, said Brian Turner, president and chief of economist at Meridian Economics in Plano, Texas.
“For a $300 million credit union with 12% of its assets held in cash, a 25-basis point increase just added 3 basis points to their ROA, a six basis point improvement,” he said.
Turner warned however, that it is unclear what impact recent upward trends in loan delinquency might have in offsetting the marginal increases.
“This makes it even more important for credit unions to limit its loan originations to no lower than B -plus paper until the economy achieves a more broad-based growth profile,” Turner said. “The potential loss from default could be much greater than the incremental market rate retained by the credit union on those riskier loans.”