MADISON, Wis.–After 14 Months of rate increases, TruStage’s chief economist is offering an update on the effects on CU balance sheets, and predicts the Fed is done raising rates.
In his economic analysis released as part of TruStage’s latest Trends Report, the company’s chief economist, Steve Rick, said the Fed’s moves to push interest rates up by 500-basis-points over the last 14 months is “having a major impact on credit union balance sheets and income statements.”
“With respect to credit union balance sheets, higher interest rates have reduced the market value of investments classified as available for sale,” stated Rick. “This has caused credit union equity levels to decline, which has led to a reduction in equity-to-asset ratios. Higher interest rates have also caused deposit growth to slow or even decline as interest-rate-sensitive members withdraw funds to place in higher-yielding alternatives. If deposit withdrawals are greater than loan repayments credit unions face liquidity risk and may need to either sell underwater securities or borrow money at high wholesale interest rates.”
The Income Statement
Looking to the income statement, Rick noted higher interest rates have boosted credit union yield on asset ratios as loans reprice and investments mature and are reinvested into assets with higher market interest rates.
“Deposit pricing has become paramount in this rapidly rising interest environment as credit unions fight to retain existing deposits and attract new deposits,” Rick stated. “These efforts will greatly increase credit union cost of funds in 2023, putting downward pressure on net interest margins. Higher interest rates will also increase loan delinquency rates for members with adjustable-rate loans. This will boost provision for loan losses this year, putting downward pressure on net income.”
Fed Finished With Increases
Like other analysts, especially after the CPI numbers reported on Tuesday showed a slower pace of inflation, Rick said he is not expecting the Fed to announce a rate increase when its Open Markets Committee adjourns today. In fact, unlike some other forecasts, Rick said he believes the
Federal Reserve is done raising interest rates and will slowly reduce rates in early 2024 as the inflation rate approaches their 2% target.