Most Federal Reserve watchers anticipated that the Federal Open Market Committee will raise its target federal funds rate in the fourth quarter and continue to raise rates during 2018 and 2019. The federal funds rate will rise from 1.4 percent at the end of 2017 to 2.7 percent at the end of 2019.
The following graph shows the median projected federal funds rate for the years of 2017, 2018, 2019, and 2020.
According to a June S&P Global Market Intelligence report, the deposit beta is projected to reach 30 percent in 2017. The deposit beta indicates how much of the change in the effective fed funds rate banks pass onto customers." S&P Global Market Intelligence expects the deposit beta to reach 59 percent in 2018.
In comparison, during the last rate tightening cycle, the deposit beta was 41 percent and 62 percent in 2005 and 2006, respectively.
Moreover as interest rates rise, depositors will shift their funds from low yielding accounts into higher yielding deposits. As of June 2017, 73 percent of credit union deposits were in share drafts, regular shares, and money market share accounts; but 18 percent of credit union deposits were in share certificates.
However, a decade ago at the end of the last rate tightening cycle, credit unions reported 58 percent of their deposits in share drafts, regular shares, and money market share accounts, while 32 percent of credit union deposits were in share certificates.
What do you think your deposit mix will look like two years from now?
Keith -- I'd be interested in your take on cost of funds; is it more a function of supply and demand for money (i.e., loan to deposit ratio)? I realize the FF rate is a proxy for supply and demand, but do you see the economy driven by mortgage and home equity lending at 2007 levels by 2020, the peak median rate in your second chart?
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DeleteThe following is a corrected version of an earlier comment.
DeleteLoan to deposit ratio will affect the cost of funds. If loan demand outpaces the growth of deposits, to meet this loan demand, a depository institution will either raise interest rates on savings to attract funds or borrow from a FHLB or a corporate CU.
Rates on mortgages are tied to the 10-year Treasury. As the Fed shrinks its balance sheet, it will be reducing its holdings of longer term bonds and mortgage-backed securities. This should exert some upward pressure on longer term interest rates.
So, we should see an upward shift in the yield curve with the yield curve getting a bit steeper.