Fed's 50 basis point cut puts even more pressure on credit unions spreads

WASHINGTON – The Fed’s unpredict-ability shined through last week when it slashed rates by 50 basis points, bringing the fed funds rate to a lowly 1.25%. For credit unions, the squeeze could be on. NAFCU Economist Jeff Taylor was surprised by the Fed’s move. “If they’re doing this for the short term I don’t know if that’s wise. If they’re catering to weaknesses on Wall St., the Iraq situation and the Pitt (SEC chairman) resignation, that’s not their job,” said Taylor. As for CUs, Taylor said members have already been complaining about low deposit yields, and this cut won’t help the situation. “Some credit unions are going to have to drop share rates. They’re already so low. More members will be complaining, especially those that are retired,” said Taylor. Will the cut sweeten loan rates for members and spur lending at CUs? Taylor doesn’t think so. “I don’t think credit unions can drop cost of funds enough to bring loan rates down. Loan rates are already so low. How many members really haven’t taken advantage yet?” said Taylor. WesCorp SVP and Chief Investment Officer Bob Burrell said the 50 basis point cut will flatten out the yield curve in the five to 10 year range. He said CUs that didn’t go out farther on the curve earlier this year, are probably kicking themselves. “The good news is some credit unions have been extending maturities out there in the last month or so,” said Burell. “There’s still a lot of short-term money earning 1.25%. Most credit unions are paying 1.5% to 2% for their share accounts so this is really starting to squeeze a bit,” said Burrell. The squeeze gets worse with a lot of loans being refinanced, and the potential for callable investments to be called. Burrell said CUs have to stick to their investment plan, which should factor in these types of rate reductions. “You can still pick up yield. You have to structure things that make sense for when rates go up,” he said. Burrell said though rates have dropped again, he doesn’t see all CUs lowering share rates because they are already so low. “I just don’t think everyone is going to start paying 1.25% on deposit rates,” he said. Pete Duffy of investment banking firm Keefe, Bruyett and Woods, said the cut makes the investment portfolio even more important. “Credit unions are probably already seeing slower loan originations and will need to be sharper in the investment portfolio to preserve margins. The trick, though, is to not hamstring cash flows for when rates go back up. They should be buying short duration mortgage-back securities and short final callables, and get the money out of overnights,” said Duffy. [email protected]