ORLANDO–How would credit union leaders vote on the direction of rates if they were members of the Federal Reserve Board? The answer was nearly unanimous among CUs gathered here who cast their votes, but only after getting an overview on how the Trump administration’s policies are affecting the economy.

That overview was provided by Steve Rick, director and chief economist with TruStage, in remarks before the League of Credit Unions’ ENGAGE Conference in Orlando. 

It’s no secret why credit union leaders are paying attention to the direction of rates, noted Rick, who reminded that at their heart what a credit union does is live on the spread between the rate it pays on money coming in (deposits) and the rate charged on money going out (loans).

Saying he was focusing on the Trump administration’s tariff policy purely from an economic point of view, he said that with any policy there will be trade-offs, both good and bad. 

A Policy Overview

Rick reviewed a number of Trump policies and their economic impact, including:

• Tariffs. “Tariffs are a tax so we will see higher inflation and lower GDP, with lower deficits,” Rick said. 
• Mass Deportations. Deporting millions of workers, according to Rick, will shrink the labor force, particularly in agriculture and home building, leading to higher inflation, lower GDP and higher deficits. “From an economic perspective, not a good idea,” Rick said.
• Extension of 2017 Tax Cuts and Jobs Act. Congress is expected to pass and expand the tax cuts, which will lead to higher inflation, higher GDP and higher deficits.
• No Tax on Tips, Overtime, Social Security. The combination will lead to higher inflation, higher GDP and higher deficits, Rick said.
• Deregulation/Elimination of Red Tape. Lowering the cost of doing business will lower inflation, create higher GDP and lower deficits. “This is one of those rare policies that has no trade-offs, it’s all positive,” Rick told the meeting.
• Reduction of Federal Employees. The DOGE effect will lead to lower inflation, lower GDP and lower deficits, said Rick.

‘A Mixed-Bag’

In all, it’s a “mixed bag,” according to Rick. “Overall, if you boil this down, economists are worried about stagflation—an economy with inflation and slower economic growth. We are concerned with stagflation and so is the Federal Reserve.”
Deeper Dive into Tariffs

Taking a deeper dive into tariffs, Rick said there are eight top economic impacts.

• One: A tax increases import prices, drives down households; real incomes, and reduces the quantity purchased, Rick said. The tariffs also raise prices on domestically produced items, he added.
• Two. Substitution, or the purchasing or more domestically produced items. Tariffs could help boost the economy.
• Three. Increase in Input Prices. That leads to a reduction in volume of products sold, a reduction in corporate profits, and a reduction in capital spending and hiring. 
• Four. Tariff Policy and Unpredictability. This raises uncertainty and decreases investment spending, Rick said. “We won’t build as many factories because we don’t know about the tariffs.”
• Five: Foreign Reciprocal Tariffs. These tariffs decrease exports and domestic production, and raise the unemployment rate. 
• Six. Stock Prices. Tariffs have had a negative wealth effect as people see their stock portfolios decline and decrease spending, while increasing savings, according to Rick. That means faster deposit growth and slower loan growth for credit unions.
• Seven. Increase in consumer uncertainty. That leads to recessionary fears, an increase in savings and a decrease in spending, Rick said.
• Eight. Foreigners Boycotting of U.S. That leads to decrease in exports of goods and services, he pointed out.

“Basically, one out these eight would increase the economy in the next year or two,” Rick said. 

The Fed & Interest Rates

Rick described the Fed funds rate as the “most important interest rate in the world.” But he pointed his audience toward a different number, the “neutral interest rate,” a theoretical construct of 3% that he said is the “Goldilocks” rate. When the Fed fund rate is at 3% it means the Fed’s hands are off the economy, according to Rick.

“When rates are below 3% the Fed is trying to hit the gas on the economy. When rates are above 3% mean it means it’s hitting the brakes,” Rick explained.

The Fed’s recent lowering of rates is not an attempt to stimulate the economy, according to Rick. Instead, it just means the Fed is letting up on the brakes a bit as rates remain above 3%, Rick said.

Rick shared a graphic showing consumer credit outstanding that illustrated why CUs and banks aren’t seeing much loan growth, as the Fed looks to reduce the amount of consumer credit outstanding (see bottom of story).

Additional Observations

Additional economic observations made by Rick included:

All about the 777

Over the last seven years, Rick said credit union loan growth has averaged 7% per year, savings growth has been 7% per year, and capital growth has averaged 7%. CUs have fallen below this “gold line” at the same time the Fed has raised interest rates, Rick said.

Auto Lending

The CU loan bread and butter, auto loans, have been affected by the reduced sales in automobiles, which have been pushed down by interest rates, Rick said. But in the last few months the country jumped above the 17-million autos sold annually line, due to consumers trying to beat the tariffs, he observed.

The result was a big jump in credit union new auto lending in March and April. “But we don’t expect this to continue,” said Rick.

Rick is forecasting 16.3 million cars will be sold (3% growth) in 2025 and 16.6 million in 2026. He also expects used car loans will also tap the brakes this year. 

Recession Risk

Rick said he does not expect a recession, although there are risks that could create such a downturn. Those risks include an intensifying trade war; the Federal Reserve moving too slowly to lower interest rates; a decrease in stock prices; the Russia/Ukraine war; Rise in energy prices; Lower quality office property (which is closer to home for credit unions, Rick reminded).

Delinquencies & Charge-Offs

A 4.5% unemployment rate is the “perfect rate,” said Rick, meaning labor supply is meeting labor demand. It’s the Fed’s target. But the current market is at 4.2% unemployment, which the Fed would like to see rise slightly, he observed. The same holds true for wage increases, which have been running around 4.2%, while the Fed prefers 3.5% annually.

The labor market is a primary driver of delinquency rates, Rick said. The natural delinquency rate in credit unions is around .75%, but it’s been running higher at around 1%. “So, there is some stress out there,” he said.

Charge-offs are averaging around .76%. Rick said the ideal line would be around .05%. Inflation has been driving charge-offs, he said, as has the shortage of housing that has led to rising rents. For many, the resumption of student loan payments is also hitting their wallets

What Credit Unions Would Do

After covering all of the above, Rick asked his audience to imagine themselves as members of the Federal Reserve Open Market Committee and to vote on whether they would lower rates: perhaps 5% of the audience raised a hand. Everyone else agreed with the Fed’s current thinking in perhaps cutting rates once or twice this year.