Written by: Lance Teinert
hit a nearly 40-year high in December 2021 as consumer prices skyrocketed in
combination with supply chain bottlenecks and employment challenges. The consumer
price index spike took many by surprise, including the Federal Reserve Bank.
While America is not unaccustomed to downward economic trends, there were no modern-day
economic markers or indicators associated with a worldwide pandemic's effect on
In order to
curb long-term inflation, the Federal Reserve has announced action that will
tighten monetary policy at a faster pace than what was originally considered.
In addition to other measures, the Fed is expected to increase interest rates
throughout 2022. While many pundits believe rate hikes will be at a 25-basis
point clip, some are predicting one or two at 50 basis points each. In short,
Americans may see interest rates rise by more than 100 basis points over the
next 12 months.
conceivable that the prices of goods and services will continue to rise at the
same time interest rates on loans and credit cards increase. What does this
mean for credit unions? Simply put, interest rate hikes mean three things.
Firstly, credit unions will realize a higher cost of funds from both borrowing
conduits and deposits. Secondly, credit union members will pay higher interest
rates on new and variable rate loans. Thirdly, if loan demand decreases then
rate compression could enter the picture in both loan and investment portfolios.
continue to increase and interest rates begin to rise, will consumers cut back
on spending (particularly on large purchases such as new automobile or housing)?
Automobile loans and mortgages in 2020 represented nearly 70 percent of credit
union loan origination volume. If this percentage begins to dip, then credit
unions will have to look beyond treasury and bond yields to make up the
investments include loans that are not traditional to most credit unions. For
example, if consumers are not buying new homes, then they might be interested
in home improvement loans for improvements to existing dwellings. Another product
to consider is the private education loan. Historically, students attend college
at the same level regardless of economic uptick or downturn. Private education
loans include both finance and refinance and have traditionally outperformed many
other loan products.
credit union has the breadth of knowledge to manage home improvement and other
loan types, private education loans are unique and require experienced program
administration. CURevl, a CUSO focused on education finance, is one of several entities
that provides the expertise to deploy and manage high-quality private education
undoubtedly present challenges to credit unions that must be overcome by
deploying strategies that preserve yield and loan ratios. By adjusting portfolio
mix and product offering, credit unions can maintain healthy balance sheets and
preserve liquidity to ensure member satisfaction during a year of economic