Fed Rate Cut Impact on Credit Unions

On Wednesday, November 6th, the Federal Reserve lowered short-term interest rates by 50 basis points and shifted their bias from Weakness to Balanced. This marks the first cut in 2002, and the 12th cut since January 2001. During this period the Fed Funds target rate has dropped from 6.50% to 1.25%. Observations from the forward yield curve indicate more cuts are being priced in. Goldman Sachs is calling for another 25 basis points of easing at the December 10th meeting.

 
 

On Wednesday, November 6th, the Federal Reserve lowered short-term interest rates by 50 basis points and shifted their bias from Weakness to Balanced. This marks the first cut in 2002, and the 12th cut since January 2001. During this period the Fed Funds target rate has dropped from 6.50% to 1.25%. Observations from the forward yield curve indicate more cuts are being priced in. Goldman Sachs is calling for another 25 basis points of easing at the December 10th meeting.

As of June 30, 2002 credit unions had nearly $50 Billion in cash and cash - equivalents. The most recent Fed easing could cost credit unions $250 million in investment income. Credit unions have taken a very ''proactive'' approach in their investing throughout the past year. Investments in the 1-3 year bucket increased 9% percentage points as a portion on the portfolio. The majority of the funds were reallocated from the less than 1-year portion of the portfolio.

The continuation of a falling interest rate environment will make attracting new loans even more critical to credit unions in the coming year. Typically, the first quarter is when most credit unions experience an increase in liquidity. With short-term investments delivering lower yields, credit unions will likely be searching for alternative investment options.

Greg Manweiler, VP of Finance for Langley Federal Credit Union expressed his thoughts on the new rate environment. “With this rate cut, not only do we credit union professionals need to take a quick look toward lowering our deposit rate offerings immediately, we must reassess our investment portfolio's to see the impact that this rate change will cause to our callable investment portfolio issues. The impact of both could be very significant for 2003!”

 

 

 

Nov. 11, 2002


Comments

 
 
 
  • Comments too general
    Anonymous
     
     
     
  • How true, could be some hard times ahead.
    Anonymous
     
     
     
  • Credit unions looking for an excuse for poor performance in 2003 will jump on this one.
    Anonymous