Catalyst News

Credit Unions Will Feel the Impact of the Fed’s Half-Percent Interest Rate Cut

by Catalyst Corporate | Mar 03, 2020

In response to economic concerns caused by the spread of coronavirus to more than 60 countries, the Federal Reserve this morning lowered the federal funds rate by one-half percent. The move is widely seen as an effort to boost growth against the chilling effects caused by the spread of the virus. The Fed’s move will also impact credit unions.

A Fed statement noted “the fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

The Fed’s actions come following a dramatic and record-setting tumble by the U.S. stock market and a drop by the 10-year bond to the lowest level in history – even lower than during the financial crisis at the end of the last decade.

“We’ve seen a lot happen over the past week or so, as the concerns mounted because of the virus’ impact,” said Mark DeBree, managing principal of Catalyst Strategic Solutions. A wholly owned subsidiary of Catalyst Corporate Federal Credit Union, Catalyst Strategic Solutions provides client credit unions with asset-liability management services and balance sheet advisory services.

“China has a massive influence on the global economy. With that country being hit so hard by the virus, there is real concern about a global slowdown,” DeBree said. “And with coronavirus now taking hold in United States, the Fed is taking action to try to stay ahead of any slowdown here.”

The cut is supposed to stimulate economic activity, DeBree said, but it will also cause an immediate impact on credit union investment yields. “This action should have a near-term effect on loan growth but will also cause interest income to decline,” DeBree noted.  

Although 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 said.

“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 outperform the new loans.

“The long-term impact of the coronavirus is unknown,” DeBree said. “It is even reasonable to think the impact may be short-term.” But that doesn’t mean credit unions should be 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 learned,” he said.

“Resist putting money into cash and waiting for a rebound,” DeBree cautioned. "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 said. “It may be necessary to adjust some strategies but keep investing.”