WINSTON-SALEM, N.C.—Given the economy has been in “uncharted waters” with rates so low for so long, one CFO contends it is difficult to predict both how the market will react when the Fed finally begins pushing rates as well as what might happen with margins.
“This is new territory for us,” said David D'Annunzio, CFO at the $1.9-billion Truliant FCU here, about the prolonged low-rate environment. “There are all these large financial institutions sitting on the sideline with liquidity to put to work, and we could see a situation where competition for loans keeps loan rates down, but a move by the Fed raises deposit rates. That would pinch margins even more. I don’t say that is expected, but credit unions have to consider the possibility.”
Predicting how the market could react to a rate hike based on history is not easy due not only to the protracted low-rate environment but also to consumers being aware of Fed rate moves.
“Face it, prior to the recession was the general population even aware of the Fed moving of rates? Most of the time, before this recession, Fed rate moves happened with little fanfare,” said D'Annunzio. “This will be something completely new—with the press and the populous waiting in anticipation of the Fed. It will be a bigger story than ever and may bring about market pressures we have not seen in the past.”
No Signs Of Competitive Pressure
D'Annunzio said that in his market there have been no signs of FIs getting a jump on the expected Fed rate hike, which most analysts predict will occur later this year.
“What we are seeing is sporadic rate hikes from individual institutions that are tuning their strategies as opposed to overall market pressure forcing rates up.”
David D'Annunzio
It has been a somewhat tense situation this past year, acknowledged D'Annunzio, who said FIs have been in a “starting stance waiting for the (Fed’s) gun to go off.”
As other analysts have stated, D'Annunzio believes deposits from retirees should be watched closely now, as seniors are likely to move funds fast when rates rise.
“As we know retirees depend on their CDs for a portion of their income,” said D'Annunzio, a member of the CUNA CFO Council. “We think they are watching the Fed closely.”
No Need For Early Move
D'Annunzio said Truliant does not see the need to get ahead of any Fed move with a rate increase.
“I don’t think updating our rates after the Fed moves will cost us with our membership,” he said. “We monitor rates closely and the day the fed makes its announcement we will have a meeting to discuss what our rates will be. Once we decide to make a change in our rates, It won’t take us long—less than a week.”
D'Annunzio predicts, however, that some FIs with low liquidity may move rates up ahead of the Fed to protect their deposit base and bring in new money.
But the typical credit union today has high liquidity, noted D'Annunzio.
“Yet if lending continues to improve, even these credit unions may want to hold onto that liquidity and that could lead to more deposit competition,” he said.