Credit unions welcomed the long-awaited, much-anticipated move by the Federal Open Market Committee to raise the Fed Funds rate for the first time in nearly a decade.
The Federal Reserve's FOMC cited a climate of moderately expanding economic activity, rising spending, falling unemployment, mild inflation and an improved housing sector as sound reasons for the rate hike.
"There has been considerable improvement in labor market conditions this year, and [we are] reasonably confident that inflation will rise over the medium-term to its 2% objective," the Fed said in a policy statement.
Further, FOMC suggested future modest rate hikes.
"In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal," the Fed added. "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."
Credit union officials widely praised the Fed's move.
Perc Pineda, senior economist at Credit Union National Association (CUNA), said the rate hike signals that the U.S. economy is on "solid ground" and will "positively impact" savings and investments leading to higher GDP growth.
Pineda explained that as GDP growth and credit union loan growth are positively correlated, "higher rates will have a net positive effect on credit union lending. The current trends of rising loan growth and savings growth at credit union are expected to continue."
Pineda added that "if the long-term expectations of the household and business sectors are upbeat, we could be seeing higher growth moving forward. Savers have long been disadvantaged by lower rates of return for seven years."
Pineda also noted that since any future rate hikes are likely to be gradual, they will cause no disruption to financial markets – or credit unions.
"The interest rate risks that credit unions face are minimal considering that for the third consecutive year, long-term assets as a percentage of total assets have been falling," he said.
NCUA Chief Economist Ralph Monaco, said that, in general, a strong economy is good for credit unions and their members. "It means that credit union members have jobs, are getting raises, and taking out loans for education or to buy homes or cars," he said. "We've seen the stronger economy reflected in recent credit union performance."
For some credit union members, higher short-term interest rates will likely increase the dividends they receive on their deposits, he added.
Curt Long, chief economist at NAFCU, said as the Fed looks to adopt a "more gradual pace to rate normalization," his organization forecasts "continued growth" in credit union lending in 2016.
"Households are in a strong position with low unemployment, falling gas prices, low debt service costs and early signs of wage growth," he stated. "Regardless of the rate environment, credit unions will continue to thrive, and our forecast is for continued growth in lending in 2016."
Callahan & Associates also predicted boom times for credit unions. Noting that credit unions have been enjoyed record loan balances, such growth should continue unabated – driving interest income higher -- even if the Fed continues to hike rates.
"With lending accelerating it gives the industry the ability to re-price their loans," said Jay Johnson, EVP and partner at Callahan. "Credit union CEOs and CFOs have been focused on asset-liability management and interest rate risk putting them in a great place as rates start to increase."
Callahan also pointed to the fact that net interest margins are stable and demonstrate credit union's ability to maintain sufficient margin to meet operating expenses, despite the economic turbulence and volatility that the country faced over the past decade. Now, the net interest margin is at 2.86 percent, up 1 basis point from a year ago.
Also, from an investment perspective, Callahan said price risk is "minimal" and available-for-sale [assets] as a percentage of total investments has been increasing, "providing credit unions with greater flexibility and balance sheet liquidity in asset-liability management." (Price risk represents the fluctuations in the value of a security or a portfolio when market interest rates change.)
Callahan explained that if rates increase, the value of an investment portfolio would theoretically decline. But price risk as a percentage of net worth for the credit union industry is currently only 0.87 percent. "For the past 10 years, credit unions' total price risk has been minimal, with the largest unrealized losses representing just 1.1 percent of the value of total investment losses in 2005," Callahan specified.
Brian Turner, president and executive director at Meridian Alliance LLC, indicated that regardless of what pace the Fed undertakes next year with respect to rate hikes, he suggests that consumers should not expect subsequent increases in mortgage or vehicle loan rates for a while. "Other loans, like credit cards and home equity credit lines could see slight increases over the next few weeks depending on how modest future rate hikes might be," he stated.
"Rates on non-term shares will not be impacted and term certificate rates will move no more than 10 basis points on average," he said.
Historically, Turner added, credit unions' costs of funds are not impacted during the first 200-basis-point shift in Federal funds rate anyway.
"Also, the cost of liquidity declined on the move," he said. "For a $200 million credit union with $20 million in cash, their earnings just improved by $50,000, or 3 basis points doing nothing."
Johnson of Callahan concluded that the Fed's move demonstrated confidence in the economy and "it gives credit unions the opportunity to further support members' borrowing and saving needs."
