CFO Focus: Federal funds rate considerations for credit unions

The highest rate in more than 15 years could have a big impact on cost of funds and ROA.

May 11, 2023 by Sean Zimmermann, CU Management

The Federal Reserve’s latest 25 bps increase in the fed funds rate presents opportunities and challenges for credit unions. With the grand total of rate increases since early 2022 now at 5%, this puts continued upward pressure on credit unions’ cost of funds and potential downward pressure on net interest margin and return on assets as more credit union members seek higher rates on deposits.

For perspective, the last time the fed funds rate exceeded 5%, it climbed to 5.25% in July 2006 and stayed at that level through July 2007. Such rate levels attract the attention of consumers and businesses, as they demand better rates or will move to get more return on their deposits. The result was a cost of funds for the credit union industry that increased to 3% by March 2007 and stayed above 3% through March 2008.