Editor's note: Our sister paper, the Spokane Journal of Business, recently hosted Ezra Eckhardt, CEO of STCU, on its “Elevating The Conversation” podcast. This podcast, which runs just under 50 minutes, is available on Apple Podcasts, Amazon Music, Spotify and elsewhere. Search for it on any of those platforms to hear the entire conversation, but for now here are five takeaways from the episode, in Eckhardt’s words.

1. Interest rates feel high, but are historically normal. We’ve all become spoiled because of what we thought was normal. From 2008 all the way through the end of 2022, the federal funds rate was basically zero. 

You have almost an entire generation of consumers that think a 3% mortgage is a normal thing. If you look historically at the longer-term history of financial institutions, that’s just not the case.

You know, 7% is much more normal than 3%. For the Federal Reserve rate, if you look at the historical average all the way back to 1970, it averaged 5.4%. So, we still aren’t even at the average of the 55-year normal range. We’re still below average, and that average includes the 16-year period of time when it was effectively zero. If you were to remove that period of time, I would argue that an average is probably more like 6.5%. 

Mortgage rates aren’t directly correlated to the Fed funds rate, but they’re sort of an echo or a reflection of that rate. A mortgage would typically be somewhere between 2 and 3 percentage points above the Fed funds rate.

When we look at the higher interest rates, though, they cause all sorts of other things to happen. If I bought a house six years ago and I have a 3.25% mortgage, I’m less inclined to sell that house today and buy a new house that has a 7% mortgage. That causes a little bit less inventory of homes on the market.

Also, the cost of borrowing obviously goes up on a car, a house, a credit card, a business loan, which means the capacity for borrowers to borrow is decreased.

2. Rising interest rate environment brought lag. When you think about a financial institution, the model is very straightforward. You are taking a deposit, which means you’re borrowing money from somebody somewhere, and you’re making a loan with that money and collecting interest and charging a fee. That cost to borrow, or the deposit rate, is increasing, for sure. It’s directly correlated to what happens with the Fed funds. 

What happens is that everybody wants more money on their deposits right away, and then they’re going to try to hold off on refinancing their loans or getting new loans. So there becomes this lag that shows up on the balance sheets of banks and credit unions. There’s an entire process and a full committee in every single financial institution called the Asset and Liability Committee, ALCO, where we look at the timing of how we manage that cost of funds and the ability to issue new loans.

We would all love to make 5% on a certificate of deposit and have a 3% mortgage, but the math on that does not work. If you have a 5% CD, you’re going to have an 8% or 9% new mortgage, or higher.

3. Less money in system creates challenge. One big challenge is that there is less money in the system, and there’s less money for two different reasons.

One reason is that people are just saving less dollars. If you add up all of the savings accounts, money markets, and CDs of all the consumers and businesses, that number has decreased by 4% or 5%. 

On top of that, there are just fewer dollars. The Fed has paid off a lot of the debt that it issued, so there’s fewer dollars in the system. And that decrease from the Fed is somewhere between 5% and 10%. So, let’s just say there’s about 10% less real money.

If we look at just kind of the supply and demand, there’s going to be limited supply of money, so there’s going to be higher demand for deposits. I would expect that the return on a CD or a money market is definitely going to stay at a higher level than it was from that 2008 to 2022 period of time, and they’re probably going to stay in the 3% to 4% range regardless of where the Fed balances out rates.

The longer-term deposits are going to have a little bit higher rate. That means then also, just on average, the total cost of loans will be a little bit higher also. 

My guess is that the Fed looks at what their monetary policy is, they’re probably not going to be looking to put a whole bunch of new money into the system, so that dynamic could be around for a long time.

4. Merger-and-acquisition activity in industry is expected to continue. Bank-to-bank or credit union-to-credit union consolidation has gone on at a rate of about 4% per year for at least the last 30 years. I’ve been in banking now for over 20 years. When I started, there was about 8,600 banks and about 8,600 credit unions. That rate of consolidation has brought us down to somewhere around 4,600 credit unions and 4,300 banks. So, the merger activity may be a tick faster on the bank side. 

That rate of consolidation probably is going to continue to occur. The bigger banks are going to continue to get bigger, and there will be fewer, smaller banks and fewer smaller credit unions. It’s just what is going to happen. 

That’s opened up this new door, which is a credit union acquiring a bank. It’s newer, but has been occurring for at least the past eight or nine years and has gained momentum in the last four or five years. It’s a supported transaction in the state of Washington and the state of Oregon.

By the end of this month, the month of August, there will be in total of 81 credit union acquisitions of whole banks. They’re occurring at a rate of around 12 to 20 per year.

This acquisition we announced just so happens to be one of a recent spike that has occurred in the state of Washington, but it’s not the only one.

5. The economy likely is resetting. We’re just at this point today, in my opinion, where you can see that we’re sort of resetting the flow after probably at least three massive changes.

The first one is, as an outcome of the Great Recession, the interest rates stayed low for a much longer period of time. The second one is that also out of the Great Recession, we turned off somewhere between 75% and 85% of all of our housing construction capability, which caused a spike in home prices.

And then the third one is what happened during the pandemic and our response to the pandemic. And then you overlay two long-term wars in the middle. 

We’ve got a different period of time, and we have to get back onto the historical cycle of how the economy is going to work.

Traditionally, some flavor of a boom-bust or a growth-and-recession cycle exists, and it occurs on a five- to 10-year trend. You can look at it in the history of the United States, all the way back through the early 1800s, but it’s a lot more cyclical following World War II. 

The Fed has, I think, done a nice job of getting us back on track, but those cycles got cattywampus after 2010, and it looks like they’re returning to some form here in 2024. 

We can go back and look at it, but mathematically, we had one massive recession at the beginning of the pandemic, and then we’ve probably had a mini one inside of it that we didn’t really feel exactly. Maybe we’re sort of working our way through possibly kind of a third one that gets us reset.