MADISON, Wis.–The negative growth of money deposits will become less intense in 2024 due to most rate-sensitive funds having already moved to other vehicles, according to TruStage’s chief economist.
Writing in the company’s newest Trends Report, which offers an update on credit union performance through February of this year, Rick noted that since the Federal Reserve started raising interest rates in March 2022, credit union cost of funds has
more than quintupled, rising from a record low 0.35% in the first quarter of 2022 to 1.95% today.
“This 1.6 percentage point jump in funding costs was due to a ‘rate effect’ and a ‘mix effect’,” Rick stated. “Credit unions responded to the Federal Reserve by raising their deposit interest rates on money market deposit accounts and share certificates. This rate effect contributed approximately three-fourths of the 1.6 percentage point increase in funding costs. The other 25% was due to the mix of credit union deposits shifting from low-cost “money” accounts (checking, savings and money market deposits) to high-cost investment like accounts (share certificates).”
Rick noted that today, share certificates now make up 27% of all credit union deposits, up from only 13% in March 2022.
Answering the Question
“So, what is driving the drop in money accounts (i.e., checking, savings, MMDAs) and the rise in investment accounts (i.e., certificates of deposit)?” asked Rick. “The famous 20th century economist John Maynard Keynes theorized that the demand for money accounts was a function of interest rates, income and the price level. He stated that a rise market interest rates should reduce the demand for checking and savings balances. The interest rate on CDs and Treasury bills represents the opportunity cost of holding checking and savings balances that typically pay little to no interest.”
Rick said the chart shown here shows the negative relationship between credit union “money” account annualized growth rates and the Fed Funds interest rate.
Lessons from Earlier Cycles
“Whenever the Federal Reserve raises the Fed Funds interest rate by more than three percentage points, the credit union combined checking, savings and MMDAs growth rate turns negative as funds shift to CDs or move to money market mutual funds,” Rick stated. “This happened in 1994-1995, 2005-2006 and again today in 2022-2024. This negative growth of money deposits will become less intense in 2024 due to most rate-sensitive funds have already moved to CDs or money market mutual funds.”
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