By Ray Birch
PLANO, Texas—The Federal Reserve may be moving fast to change directions on rates, analysts are saying after the FOMC cut rates by 50 BPs Wednesday, marking the Fed’s first rate reduction since 2020.
While the cut was deeper than some analysts predicted, experts believe it will take more time and more cuts for consumers to feel real relief.
“The move Wednesday by Federal Reserve policymakers suggests they are more confident that with the slowing pace of inflation, together with their perspective on current employment, the time is appropriate to help stimulate consumer growth without seeing purchasing power further diluted,” observed Brian Turner, president and chief economist of Meridian Economics.
However, Turner added there is the risk that should the Fed cut rates too much, too soon, it could spark another round of hyper-inflation that would in turn dilute the intended economic growth the FOMC is trying to enhance.
‘Window Dressing’
"Having said that, Wednesday’s move will mostly be window dressing to appease those who have been advocating for a Fed cut for months,” Turner said. “It should pull down the steepness of the U.S. Treasury curve, which would help the nation’s fiscal debt profile—in that the Treasury has been financing the elevated pace of federal government spending over the past nine quarters with relatively shorter-term bonds. However, other than some credit card and other commercial loans that are tied more closely to bank prime rates, the move will have relatively little impact on consumer loan rates.”
Brian Turner
Turner said the small impact on loan rates is due to the fact that most consumer rates are not priced at a spread to U.S. Treasury rates.
“At least they should never be priced that way,” he said. “In fact, over the past 20 years, the relative pricing spread for five-year vehicle loans has ranged from -50 BPs to 450 BPs, and yet the change in market rates has been minimal. In fact—not including COVID—the last time the Fed cut the target rate by 100 BPs, the pricing spread of vehicle loan rates increased 80 BPs. Moreover, mortgage rates are tied further out on the curve where, in this environment, there is more volatility as money policy has been injecting significant funds into the economy.”
Shift May Be Small
While consumers should see downward trends on borrowing rates, Turner said the shift may be slight and felt over a longer period of time.
“Same for deposit rates,” Turner said. “The rate cut will do nothing for checking and savings rates. And because of the industry’s struggling liquidity environment, hopefully this will bring down promotional-term certificate rates—but that all depends on whether credit unions have learned the lesson of 2021-23, a period that saw a significant mismatch between loan and share growth.”
The greatest impact to credit union’s earning profile from Wednesday’s cut is the loss of return on surplus cash—a significant contributor to most institution’s earnings in recent times, Turner said.
“For a $250-million credit union with a 12% liquidity ratio, a 50-basis-point cut in overnight rates means a loss of $150,000 in annual revenue,” Turner said. “Still, any drop in marginal loan rates will be at higher levels than the average rate on prevailing loan portfolios. So, hopefully loan revenues should hold up for a few more quarters. This should help to retain marginal spreads between asset yields and cost of funds."
Michele Raneri
Refi Boost?
TransUnion believes the rate cut will spark some refinance activity, and as it noted in a previous CUToday.info report, and opportunities for CUs.
“As we saw in our most recent Credit Industry Insights Report, consumers continue to have a strong demand for credit, as balances continue to creep up across most credit products,” said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. “This … reduction in interest rates could ultimately allow for consumers to see lower monthly payments. It also may allow for many consumers to consider refinancing higher interest debt into a lower interest credit product such as a personal loan or home equity loan.”
Raneri pointed out that in recent months, lenders have begun exercising more discretion when it comes to whom they are extending credit, preferring less risky borrowers.
Michael Moebs
“It remains to be seen whether this interest-rate reduction will see lenders once again offering credit to a larger segment of the consumer population, but it could help in that regard,” Raneri said.
Powell Makes Key Points
Michael Moebs, economist and chair of Moebs $ervices, emphasized that financial institutions should pay attention to key points made by Federal Reserve Chair Jerome Powell Wednesday.
“The Fed cut the basic fed funds rate 50 basis points, from 5% to 4.40%,” noted Moebs. “Fed Chair Powell also said the FOMC expects the federal funds rate to be about 4.40% by year end 2024, and 3.40% by yearend 2025. Chair Powell also answered one question on money, not interest rates, and expects the Fed’s balance sheet to keep shrinking: ‘Decreasing Fed’s holding of securities and decreasing interest rates is a balanced and consistent strategy,’ he stated.”
Rates Normalizing
Steve Rick
The normalization of short-term interest rates have begun, noted TruStage Chief Economist Steve Rick.
"The 0.5 percentage point cut in the Fed funds interest rate will reduce credit union funding costs as deposit rates on money market deposit accounts and certificate of deposits begin to come down," Rick said. "This will help boost credit union earnings during the next few quarters. Mortgage originations have already begun to increase as more members refinance their mortgage debt, which will boost credit union fee income and gains on sale of the new loans to the secondary market. Credit union members will be looking to lock in longer term certificate of deposit interest rate before rates fall further."