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ARLINGTON, Va.-At the June meeting of the Federal Open Market Committee the committee raised rates 25 basis points to 3.25%. While the recent increases have driven up short-term rates, long-term rates have remained relatively flat. In fact, the FOMC has raised the target funds rate 225 basis points but 10-year Treasury bonds are actually down. As the cost of funds increases for credit unions, the situation will “force a little pinch in their margins,” NAFCU Senior Economist Jeff Taylor commented. In the extreme, the flattening yield curve could actually invert, which is typically a sign that the bond market thinks the economy will sour. However, Taylor said he feels the economy is growing strong, with GDP revised up from 3.5 to 3.8%. The flattening could also indicate that inflation or oil prices might be on their way back down. The Fed signaled that it is concerned about short-term inflation but has not voiced worries about the long term. Taylor said that the FOMC’s consistent increases indicate that the monetary policy making body is not that concerned. “The Fed has been raising rates like crazy.If they thought they were really going to choke the economy off, they wouldn’t be raising rates so aggressively,” he stated. Anyway, the longer-term rates are likely to go up in the fourth quarter, Taylor added. In the meantime, credit unions have been coping fairly well. They are not moving the regular share and share draft rates, but they have been repricing CDs to draw in longer-term funds. Still, Taylor said, credit unions’ overall ROA is likely to drop again this year down to around 0.89%-0.90%. “That’s still fairly healthy,” Taylor commented, despite the fact that credit unions are normally more up around 1%. Some credit unions are being impacted more than others, he hypothesized. Credit unions that are not in indirect lending or real estate could really feel the pinch, which are generally smaller credit unions. Despite this concern, Taylor said he does not think it will significantly accelerate the consolidation contributing to the disappearance of smaller credit unions, though some may begin looking for partners.

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