Low inflation and recent signs of a slowdown in job growth appear to be preventing a Federal Reserve rate hike from taking place anytime soon, and economists said that likely means more of the same for credit unions.
In comments to the World Affairs Council of Philadelphia on June 6, Fed Chair Janet Yellen said although the overall labor market has been positive, inflation is still too low and a June 3 labor report showed a concerning decline in the number of people actively seeking work.
"My overall assessment is that the current stance of monetary policy is generally appropriate, in that it is providing support to the economy by encouraging further labor market improvement that will help return inflation to 2%," she said. "At the same time, I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run."
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CUNA Vice President of Economics and Statistics Mike Schenk said forecasts point to a possible quarter-point rate hike at the end of the year. For credit unions, that means more of the same: Unhappy savers and a good demand for loans.
"We're on track now for a third consecutive year of double-digit gains in credit union loans," he said. "You've got to go all the way back to 1988, so almost 30 years ago, to see three consecutive years of double-digit gains in loans."
It also means more credit unions are doing liquidity testing to ensure they can withstand the outflows to money market mutual funds that might occur if rates rise, he added.
NAFCU Director of Research and Chief Economist Curt Long said the postponed rate hike may also encourage credit unions to continue moving toward shorter-duration investments.
"That's, generally speaking, a good thing," he said. "They're going to be prepared for this period of rising rates and not be locked into these long-term investments. With that said, probably no one saw – well, I shouldn't say no one – but probably a lot of us expected that we would've gotten to the next rate hike by this date."
And if the Fed raises rates unexpectedly, don't look for lending to dry up quickly, Schenk said.
"People see the Fed moving and they think to themselves, 'This is just the beginning of something that will go on for a while, so if I don't borrow now I'm going to be paying more in the near future,'" he explained.
Margins won't fatten up quickly, either, Long said.
"[A rate hike] would first affect the short end – especially savings rates could potentially be affected, but it's going to be a delay there," he said. "It's not going to happen overnight, but it's even less of an influence over longer-term loan rates, in particular. You're not going to see a mortgage rate jump just because the Fed takes some action."
That means the battle to keep fees in check will likely continue for some time as well, Schenk said.
"It has also made them focus more on operating expenses and controlling those expenses, and looking for ways to embrace economies at scale and do things more efficiently," he added.
In her comments, Yellen said she expects the economic expansion to continue and that inflation should hit 2% over the next two years. In other words – low rates won't last forever.
"The Fed does want conditions to be right, not just overall but specifically," Long said. "They want calm waters.
He added, "We were pretty close."
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