A Direct Line Blog

By Ian Trebilcock, AIM Financial Analyst

The Federal Open Market Committee’s (FOMC) decision to implement a 50-basis point rate (BPS) cut has significant implications for credit unions. This cut will reduce the cost of borrowing for members, potentially increasing demand for loans. With lower interest rates, borrowers may be more inclined to finance major purchases or refinance mortgage loans, leading to heightened lending volumes. While lending demand may increase it is important to offset the higher credit risk that comes with the potential economic slowdown.

The rate cut also presents notable challenges, particularly concerning net interest income (NII). Margin compression between loan yield and a credit union’s cost of shares and certificates is a challenge that all credit unions will have to face in an environment where rates are falling. Meeting your members’ needs and staying on a path that keeps a credit union profitable is going to require monitoring and adjustment over the next few years.

In a low-rate environment, those managing a credit union’s balance sheet might reconsider their investment strategies. Locking in longer term yield may seem appealing with rates still in elevated positions from what we normally see. Liquidity is still a high priority for the financial industry. Our suggestion is to use these elevated rates to create a strong ladder. Having a sound investment strategy and sticking to it will ensure you are able to take advantage no matter what rates are available and have liquidity available to you when you need to keep up with member demand.

On a broader economic scale, the FOMC’s rate cut aims to stimulate growth and decrease unemployment. The credit union movement serves a vital role in the boarder economy to serve specific populations with access to credit. Access to lending and the benefits that credit unions bring to their community’s help contribute to the economic stability of those same communities.

While the 50-basis point rate cut provides opportunities for enhanced lending and community support, credit unions must navigate the complexities of profitability, interest rate management, and member expectations. Successfully balancing these factors will be essential for each credit union’s continued success and ability to positively impact their communities.

As always, reach out to an AIM representative if you have any questions or would like to talk through any of these strategies. We are happy to review your investment portfolio for opportunities to lock in some yield or run higher prepay/elevated cost of fund scenarios on your next ALM report.

Since 1992, the Asset & Investment Management Service (AIM) has consulted with credit unions of all asset sizes, providing sound, practical and impartial financial advice. With AIM, you can join a trusted partner who will help manage your assets and meet your targets. AIM offers a variety of products and services to assist credit unions with ALM, liquidity, investing, and other related issues.

Email: aim@millenniumcorporate.org  |  Phone: (855) 882-8474  |  AIM Asset & Investment Management