What credit unions should know about the economy and interest rates in 2024

person sitting by a window

Avoid the temptation to focus on GDP and basis points; the big picture is more instructive

For the last few months, it seems as though every discussion I encounter about the U.S. economy in 2024 comes down to two questions: 

  1. Will we experience a recession in the next 12 months or so, or will we stick the soft landing and avoid an economic downturn? 
  2. Inflation seems to be on a sustained downward trend; when, how many times and by how much will the Federal Reserve cut the Fed Funds rate? 

We at Raddon, a Fiserv company, suggest credit unions take a somewhat broader view. That’s not to say your credit union shouldn’t focus on projected GDP numbers and Fed rate decisions. It’s just as important, however, to understand the bigger picture by considering questions like: 

  • What do current trends tell us about likely economic conditions in the next 12 to 24 months? Will we continue on an overall robust growth trajectory with low unemployment and falling inflation, or should we expect some weakening?
  • What kind of overall rate environment should we expect? Will it be one of continued volatility or should we expect some stability? Will rates fall sharply or in a more measured way?
  • How are these conditions likely to shape your members’ actions related to borrowing, deposits and savings?
  • In the event of a weakening economy, what segments of your membership will be most affected, and how? How can you promote their financial security and that of your credit union?


About Raddon

Raddon combines best practices in research and analysis with consulting and technology solutions to help institutions achieve sustainable growth and improve financial performance. Raddon has been providing innovative research, insightful analysis and strategic guidance to financial institutions since 1983.

For credit unions, success in 2024 and beyond will come from an actionable understanding of economic and interest rate trends. That understanding can empower you to respond in ways that are best for your credit union and your members. By accurately answering the questions above, your credit union will be in an advantageous position to maximize opportunities on the lending side; effectively manage deposits and deposit strategies; and retain and attract new members. 

This is the first of three articles about economic trends and conditions of importance to credit unions – and what credit unions can do in response. The second article, "How credit unions can both grow and meet their members’ needs in 2024," details the lending and deposit actions most likely to be successful in 2024. The third article, scheduled to publish the first week in March, will cover the key industry and demographic trends that credit unions should understand. 


Recession or no, expect a softer economy in 2024 

For most of 2022 and 2023, a forthcoming recession seemed to be a veritable lock. Many economists talked about it as though it were a certainty. Now, in February 2024, the consensus has shifted rather dramatically; most economists think it much more likely we’ll escape a major downturn and maybe even make a comfortably soft landing. 

I think, however, the recession-versus-soft-landing framing is something of a false dichotomy. It obscures the regrettably strong likelihood that the economy will soften in 2024 – whether or not that weakening meets the somewhat nebulous criteria to label it a recession. 

We’re particularly concerned about declining consumer financial health, specifically for the lower quintile to quarter of the population, as measured by income. In 2023, even though employment was strong, real household income declined for the third consecutive year, and savings rates also fell. Personal debt levels also grew in real terms. In recent weeks, we’ve begun to see unmistakable signs of a weakening labor market (the once again unexpectedly strong jobs report from January, while certainly welcome, doesn’t tell the whole employment story).

Although we expect the impact of deteriorating consumer financial health to be unevenly distributed (with higher earners less likely to feel the effects), we advise credit unions to monitor consumer financial health at all levels of income. After all, numerous factors could further weaken the economy and, as a result, spread the pain further across the income spectrum: inflation could reignite or flare up in unexpected places; geopolitical instability in the form of multiple, potentially widening wars and threats of war could depress growth; and supply-chain disruptions remain a risk. 

More recently, as inflation has receded, wages have begun to outpace price increases, most notably at the lower end of the income distribution. This is, of course, a welcome development, but we’re more concerned about unsustainable spending and debt levels – again, mostly in the lower 20% to 25% of the income range. 

Consumer spending has remained persistently (indeed, somewhat puzzlingly) strong, but we think credit unions should take note of rising debt levels – fueled largely by explosive growth in the average size of automobile loans and credit card debt. These are two historically important product areas for credit unions. It will be important that they manage prudently as these risks persist in 2024 and beyond. Buy now, pay later (BNPL) is another factor to bear in mind. BNPL has seen reduced attention, but it remains a significant risk concern for younger, lower-income members.

Don’t expect a return to ultra-low interest rates

For the credit union industry, 2023 was a year of significant illiquidity. They had little choice but to bid up interest rates on the deposit side, and we saw rapid increases in the cost of funds, leading to significant margin compression. In parallel, the sharp rise in interest rates precipitated a dramatic contraction in home mortgage refinancing, which has traditionally been a key product for credit unions.

Late in 2023, the Fed began telegraphing its intentions to make as many as three cuts to the Fed Funds rate in 2024. More recently, some observers anticipate as many as six cuts. No one knows where the Fed Funds rate will end up in 2024, but it seems likely rates will fall to some extent. However, we expect more stability in the rate environment than rapid reductions. 

An environment of lower, more stable rates should improve liquidity for the industry as a whole; however, the Fed’s actions aren’t the only factor influencing the current and future rate environment. Massive generational shifts (in the form of baby boomer retirements) and the impact of the federal debt will also have a major influence on rates in 2024 and beyond.

We think it’s very unlikely we’ll return to the ultra-low-rate environment we became accustomed to in the approximately 15 years prior to March 2022, when the Fed enacted the first of 11 rate hikes. Interest rates have indeed been volatile, with the current trend rising sharply. It’s understandable that we may feel as though we’re currently in a decidedly high-rate environment. When viewed in the context of Fed Funds interest rates since 1979, however, rates today are well below the historical average. 

Barring a deep recession or other kind of economic shock, we think the Fed will be very resistant to cutting rates deeply; in essence, without compelling cause, the Fed will be reluctant to return to what it views as an anomalous, ahistorical, low-rate environment. Also militating against deep rate cuts will be Fed fears of recurring inflation or flareups from inflationary pockets of the economy. 

As mentioned above, Fed decisions alone won’t determine interest rates in 2024 and beyond. 

In recent decades, massive savings by the boomer generation have helped to push interest rates down. As boomers retire and their incomes recede, savings will also fall. This will put more upward pressure on interest rates owing to lack of available funds. 

Another factor in the future rate environment will be the federal debt. Interest rates near zero for most of 15 years made the debt something of a nonfactor in setting rates. In a higher-rate environment, the debt is more likely to reduce the amount of available funds. 


Now what do we do?

In my article next week, I’ll focus on the actions credit unions can take in response to the conditions covered above. We’ll discuss, for example, the need for credit unions to embrace consumer-mortgage-based products that are not traditional strengths – namely, the mortgage-purchase market and home-equity products. And we’ll cover ways to adapt to the persistently high cost of funds and a likely a reduction in available funds.