2024 U.S. economic outlook and its impact on credit unions

Published by: Jose Ortiz

January 24, 2024 | TruStage

by Steve Rick, Chief Economist for TruStageTM

Recent economic and market data tells us 2024 will bring slow but steady economic growth and possible interest rate reductions. The Fed will continue to battle inflation with a balanced approach to interest rates in hopes of staving off a recession and bringing inflation rates to an acceptable standard.

2024 inflation and interest rate predictions

Presently, the effective federal funds rate stands at 5.35 percent, with projections suggesting a marginal drop in the summer of 2024. Despite this modest decrease, caution is advised regarding the Federal Reserve’s approach to lowering the inflation rate, given its persistent nature, particularly the core inflation rate, slightly above 4 percent.

Both government and private sector spending remains strong, with high foreign spending and residential investment due to homeowners holding onto low mortgage rates and ongoing inventory rebuilding to meet consumer demand.

During the Federal Open Market Committee’s latest meeting on December 13, 2023, a unanimous decision was made to maintain the key federal funds rate in a target range between 5.25 percent and 5.50 percent.

2024 Consumer Price Index (CPI) and real Gross Domestic Product (GDP) predictions

The CPI has risen by 3.2 percent over the past 12 months. Projections indicate a decrease to 3 percent in 2024, approaching the Federal Reserve’s target of a 2 percent CPI rate. This is a positive trend, considering the previous year’s peak of 9 percent year-over-year (YoY) inflation rate.

On the real GDP front, growth is expected to be 1.5% in the upcoming year, a slight decline from the current year’s 2.5 percent growth. Relatively high interest rates throughout 2024 are anticipated to keep real GDP growth at a lower but reasonable level.

2024 mortgage rate prediction

Current U.S. 30-year fixed mortgage rates range from 6.75 percent to 7.25 percent, depending on the state. The expectation for 2024 is a one-percentage-point decrease, influenced by the recent drop in the 10-year treasury from 4.7 percent in November to 3.9 percent in December.

Looming liquidity crisis in 2024

The primary concern is the liquidity risk of deposit runoff at banks and credit unions. Credit unions may face challenges in retaining deposits, with a significant decrease in assets allocated to cash and investments over the past year. The decline in the surplus funds to asset ratio, from 36 percent one year ago to 24 percent, signals a potential liquidity squeeze.

Credit unions need to be prepared for a liquidity crisis that could hit in 2024 by performing routine assessments, while monitoring the economic landscape. Practicing these preventative behaviors could help you respond proactively to market changes.

Credit unions are particularly vulnerable to a liquidity shortage, attributed to weak deposit growth and stronger loan growth. Forecasts suggest 3 percent deposit growth in 2024 due to a decrease in the money supply by nearly 5 percent year over year. The competition for a reduced pool of deposits has led to an increase in deposit interest rates.

Supporting credit union members in 2024

Despite the challenges, credit unions maintain a bright spot for members. Credit unions continue to offer competitive loan rates, outperforming traditional banks. Last year’s market share surge was attributed to the strategic advantage gained during the Federal Reserve’s interest rate hikes, where credit unions implemented gradual rate adjustments. This approach will persist in 2024, with credit unions maintaining lower rates to stay competitive.

The U.S. economy is expected to continue its slow but steady expansion, supported by incremental growth in key areas. However, credit unions should prepare for a potential liquidity crunch in 2024 with historically low deposit growth in the industry. Also expect the Federal Reserve to be cautious with interest rate adjustments but anticipate drops in the latter half of the year.

The views expressed here are those of the author(s) and do not necessarily represent the views of TruStage.

TruStageTM is the marketing name for TruStage Financial Group, Inc. its subsidiaries and affiliates. Corporate headquarters are located in Madison, Wis.

© TruStage 2023

Contact Jose Ortiz for questions or assistance.

Jose Ortiz
Jose Ortiz Sr. Business Solutions Manager E: jortiz@ohiocul.org
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