How low can they go? CUs may have to cut core deposit rates after latest Fed cut

WASHINGTON – At some point the bottom of the Federal Reserve’s rate-cut barrel is going to come along, but it wasn’t this month. The Fed cut the fed funds rate by a quarter point, bringing it to 3.5%, the lowest rate for the fed funds in seven years. The cut marks a 300 basis points reduction in the rate since the beginning of the year. The fed funds rate dictates the rate at which banks lend money to each other. Credit unions, which are already seeing shrinking margins, may be forced to lower rates on deposit accounts, say CU economists. “Interest rate margins are 17 to 20 basis points lower now than they were at this time last year,” said CUNA Economist Mike Schenk. “To the extent that they decide they want to maintain their level of earnings, some credit unions will look to lower core deposit rates,” said Schenk. “Small credit unions are probably more likely experiencing really, really weak loan growth, and strong savings growth. So there’s a strong argument for them to lower rates.” Schenk said CUNA data show that CUs, which are historically slower than banks in changing rates in reaction to rate cuts, are up to date with rate cuts on money markets accounts and share certificates, but not with regular shares. “Credit unions have been responsive to all of the Fed’s cuts so far on most of their money market and certificates, with two-thirds indicating they’ve decreased rates on those accounts. Only 15 to 20% tell us they’re decreased rates on regular shares,” said Schenk. This is where CUs may have to take action. Schenk said CUs are reluctant to reduce rates on these accounts because the rates are already pretty low, and many small CUs that don’t offer a broad array of deposit products, use the share account to compete against the savings products of other financials. So at a lowly 3.5%, how low will rates go? NAFCU Economist Jeff Taylor believes that the Fed will make at least one more cut before the end of the year. “I think there will be one more in October or they could wait until November. We should get a 50 basis point cut,” said Taylor. Taylor said the economy really hasn’t seen the results of recent cuts just yet. “A lot of these rate cuts haven’t kicked in yet. Even perhaps this last one could come back and haunt them (the Fed). When the economy does come back, you have all this additional kick you haven’t seen yet,” said Taylor, who noted that inflation is always a concern in a falling rate environment, yet inflationary signs are weak right now. In its statement, the Fed pointed to weak business profits and capital spending coupled with slowing economies abroad, as the reasons for this latest cut. [email protected]