The Federal Reserve cut the federal funds rate by 25 basis points (bps) on October 29 (new target: 3.75-4.00%), marking the second rate cut in 2025. Markets generally expect one more cut in 2025, but the 2026 path is hazier: the Fed’s median projection points to two additional cuts next year even as some market measures imply a more aggressive path if growth slows further. 

For small credit unions, that combination, declining rates with elevated uncertainty, demands a nimble balance sheet strategy focused on margin defense, optionality management and liquidity discipline.

Guard your margin – manage deposit betas and funding mix

In falling rate cycles, asset yields often decline faster than funding costs, especially if your non maturity deposits (NMDs) are already near competitive “floors.” Plan to lower rates where you can without eroding core relationships and be strategic with CD repricing so you’re not overpaying for stability. Expect pressure on promotional CDs and high yield savings and be realistic that deposit costs may not fall as quickly as you’d like.

• Reset your internal rate floors for NMDs and map member segments most sensitive to price moves.
• Replace broad CD specials with targeted, laddered terms to avoid a single large maturity cliff.
• Use term funding (e.g., borrowings or brokered CDs) to smooth funding gaps if member pricing proves sticky, and match tenors to expected asset cash flows.

Expect earlier cash back – prepayment & call risk will rise

You may not see a classic mortgage‑refinance wave, but runoff can still accelerate in consumer loans (e.g., unsecured and used auto from 2023–2024 vintages) and in securities with embedded options such as callable bonds, newer Mortgage-Backed Securities (MBS). That can pull forward principal, forcing reinvestment at lower yields and compressing the Net Interest Margin (NIM). Build this reality into your cash‑flow ladders and earnings forecasts now. 

• Limit exposure to callable structures and emphasize seasoned pools or non‑callable bullets for reinvestment.
• Add contingency reinvestment plans (what you’ll buy at 50 – 100 bps lower) so you’re not reaching for yield under time pressure.

Lock reasonably, not recklessly – extend asset duration selectively

With cuts ahead, extending duration can lock in today’s still‑attractive yields, but do it selectively to avoid overlengthening if the outlook flips again. Favor barbell ladders (short liquidity + intermediate bullets) and well‑underwritten fixed‑rate loans.

• Build a laddered investment book (e.g., 1-5-year U.S. Treasuries/CDs) with periodic liquidity points.
• Set hard limits for optionality‑heavy assets like callable bonds/CDs and MBS.
• Manage the balance sheet’s cash flow and not just the cash position. 

Compete smartly on lending – price for share and resilience

If you raised loan rates appropriately as rates climbed, you now have room to lower pricing selectively to win high‑quality volume without giving away the spread. Stay disciplined on risk‑adjusted returns and avoid chasing volume that will reprice down quickly or expand credit risk just as growth slows.

• Use tiered pricing and relationship discounts to target sticky, full‑relationship borrowers.
•  Actively monitor loan pricing and adjust as needed. Focus on margins and profitability of lending in a changing rate environment. 

What to watch

When planning for the next 12–18 months, credit unions should keep three dynamics front of mind. First, the Fed’s path remains pivotal: while additional rate cuts in 2025 appear likely, the outlook for 2026 is far less certain, so asset duration and funding strategies must work across multiple scenarios. Second, deposit competition could intensify, if peers hold CD rates higher for longer, your funding costs may not fall as quickly as asset yields, creating margin pressure. Finally, option‑heavy assets such as callable bonds and recent‑vintage mortgage‑backed securities can prepay faster in a declining rate environment, so it’s critical to model that risk and cap exposure before it erodes earnings stability.

Although falling rates can squeeze margins, credit unions that plan ahead and manage deposit costs proactively can protect income and seize growth opportunities. Staying disciplined and flexible allows credit unions to turn uncertainty into advantage, strengthen member relationships, and build resilience for future rate cycles.

Next steps?

Effective balance sheet management in a changing rate cycle demands practical, custom strategies for your credit union. Our experienced team supports credit unions of all sizes with funding mix optimization and asset-liability management.

We’ll work with you to design strategies that protect margins, preserve liquidity, and strengthen resilience in any rate environment. As your trusted partner, we’re here to help you act with confidence. Get started today.

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