A strengthening U.S. economy that leads to changes in the Federal Reserve policy regarding cost of funds may mean both good news and bad news for America's credit unions.
The financial crisis in 2008 led the Fed to establish an unconventional monetary policy through which the Fed funds rate was lowered to near zero in hopes of sparking an economic upswing.
In addition, a series of bond buying programs, collectively known as “quantitative easing” was instituted to lower longer-term rates. The Fed's forward guidance linked the policies to unemployment and inflation rates, two economic indicators that have begun to ease in recent months.
The programs pushed bond yields to historic lows, but both yield curve and credit spreads have begun to widen.
A resulting change in these policies in early 2014 could see a significant upswing in credit union lending, as well as increased competition for member loans, according to Ed Yardeni, economist, consultant and ardent Fed watcher for the past 33 years.
“Financial institutions need to assess not only the outlook for the federal funds rate, but also how the bond and mortgage markets will respond to the Fed's eventual tapering of qualitative easing and its ongoing forward guidance,” said Yardeni, president of Yardeni Research in Brookville, N.Y.
Assessing these developments is bound may be challenging, he added, given next year's expiration of Fed Chair Ben Bernanke's term and the leadership transition at the Fed and the new composition of the Federal Open Market Committee.
No matter what happens, however, the marketplace is likely to change, Yardeni added.
“The good news for credit unions is that the quality of their consumer loan portfolios would improve significantly as delinquencies continue to decline,” Yardeni said. “The not-so-good news is that competition will heat up among financial institutions to lend to consumers.”
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