Overcoming Inflation and Rising Interest Rates in 2022

Written by: Lance Teinert

Inflation 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 the economy.

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.

It is 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.

If prices 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 difference.

Alternative 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.

While your 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 loan programs.

2022 will 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 correction.