Don Provides Economic Outlook, 2022 KRTA Results, CFC Update 

CFC CEO Andrew Don provided an economic outlook, district-level KRTA results and a CFC update in his 2023 CFC District Meeting remarks.

Don shared how most market participants and watchers over the last 18 months have been solely focused on whether what the Federal Reserve was doing to slow down the economy was enough to move inflation closer to its target while not causing a recession. 

“The Fed was looking to engineer a soft landing versus a hard landing,” Don said. “This time last year, if you looked at economists’ forecasts, probably two-thirds of all economists were thinking the Fed was going to raise rates too high and keep them up for too long, which could have put the economy into recession.”

Despite those forecasts, Don noted that the economy has eluded a recession because it is being propped up by resilient consumers, a tight labor market and historic federal stimulus spending. 

Housing prices have also been more resilient than expected. People with low, fixed-rate mortgages are not selling their homes, causing historically low levels of inventory, in turn keeping prices up, despite 30-year home mortgage rates now reaching 8%. 

With pressures increasing on the banking sector, Don described how CFC’s 10-member bank group of money center, large regional and international bank balance sheets are sound, but they are starting to see margin compression that will likely start to impact their earnings in the near future. He also noted that the banking market could see a round of consolidation as regional banks merge to enhance their margins, as well as in response to proposed increased federal oversight and financial requirements.

In terms of Fed interest rate forecasts, Don described how the interest rate futures market expects the Fed to start slowly lowering rates in April or May of next year in conjunction with a potential recession. 

“Rates are going to be higher, for longer,” Don said. “That’s the mantra in the market right now.” 

Don then provided an update on the 2022 CFC Key Ratio Trend Analysis results and new KRTA Pro application that launched earlier this summer and was enhanced this month. KRTA Pro provides distribution cooperatives a view of 145 ratios with more than 20 years of data online, without the need to download any files. 

He spotlighted three strong national median ratio results. In 2022, U.S. electric cooperatives reported 1% consumer growth, 3.6% growth of kWh sales and 4.5% utility plant investment growth. 

He then put members’ consumer and utility plant growth in context with CFC’s most recent fiscal year—which ended May 31, 2023—that saw CFC have its largest-ever year-over-year electric loan growth of $2.5 billion. 

“In CFC’s first quarter of our current fiscal year, we saw a $565 million net increase in loan growth,” Don said. “Just to be clear, CFC is not looking to grow for the sake of loan growth, but to meet members’ needs. CFC has plenty of liquidity to do just that.” 

Don described how, as CFC’s loans outstanding grew following the Great Recession in 2008–09, members’ equity in CFC was increased to ensure CFC maintained a strong debt-to-equity ratio.

“Maintaining a strong debt-to-equity ratio is something that our investors and rating agencies focus on and something that we at CFC will continue to look to build,” Don explained. “In fact, CFC’s Board of Directors requested that CFC develop and present an equity management plan earlier this year.”

After careful consideration of the plan in early October, the CFC Board of Directors determined to move forward with two levers to build member-retained earnings: enhanced Member Capital Securities investments and some modifications to future patronage capital allocations.

“CFC is in exceptionally good financial shape and our liquidity is very strong,” Don said. “We’re seeing a lot of demand for capital, so we want to make sure that we continue to have a strong equity base to support the strong loan demand from our members.” 

Don concluded, “I truly appreciate the relationship we have with all of you and look forward to working with you in the coming year.”