PLANO, Texas–The recent surprise cut in rates by the Fed is aimed at stimulating the economy, but credit unions need to be prepared for an “immediate impact” on the yields they’re seeing on investments, according to an analyst with Catalyst Strategic Solutions.
And additional rate cuts may take place depending on the effect of the coronavirus on the U.S. and world economies, according to Mark DeBree, managing principal of Catalyst Strategic Solutions. Debree noted the decline in the stock market and other factors have led to the 10-year bond to drop to the lowest level in history—even lower than during the financial crisis at the lend of the last decade.
The cut is supposed to stimulate economic activity, DeBree said, but it will also cause an immediate impact on yields that credit unions see on their investments.
“This action should have a near-term effect on loan growth but will also cause interest income to decline,.” DeBree noted.
But while interest income may decline, credit unions may see an increase in lending activity as the rate drop could possibly stimulate more loans and boost mortgage refinancing, he added.
“And there may be more interest in selling and buying loan pools,” DeBree said. “Credit unions interested in selling loan pools may realize higher premiums, while potential buyers may be more interested in loan pools that out-perform the new loans.”
Don’t Remain ‘Idle’
While the effect of the coronavirus remains unknown and it may even be “reasonable to think that the impact may be short-term,” DeBree said credit unions should not remain “idle.”
“It might be a good idea to look back at the financial crisis during the end of the last decade to see what lessons were to be learned,” he said.
For example, DeBree said credit unions should “resist putting money into cash and waiting for a rebound.” He noted credit unions that employed that strategy during the last financial crisis saw their recovery lag in comparison with those who kept investing during the challenging market. “Keep investing strategically,” DeBree advised. “It may be necessary to adjust some strategies but keep investing.”
Catalyst Strategic Solutions is a wholly-owned subsidiary of Catalyst Corporate Federal Credit Union and provides client credit unions with asset-liability management services and balance sheet advisory services.