It’s everyone’s favorite time of year: the budget season. Fed funds futures are signaling more rate cuts through the end of this year, and another 50 to 75 basis points of rate cuts in 2026. The challenge is translating that forecast into a budget that’s reasonable and practical. And that’s where the concept of beta comes in.
What Is a “Beta”?
In asset-liability management (ALM), beta measures how sensitive a rate is to changes in an accompanying market rate, such as Federal Funds Rate.
Your ALM model likely uses betas which are hyper-conservative or modeling “worst-case” liquidity scenarios. For budgeting, it would be better to use what we call a practical beta: a realistic estimate of how your management team actually adjusts rates.
Step 1: Apply a Practical Beta to Your Assets
Let’s start simple: overnight deposits.
Right now, say your credit union earns 3.75% on $10 million in overnight deposits, with Fed funds at 4.00%. We expect a terminal Fed Funds rate at 3.00% by the end of 2026—a total drop of 100 bp.
Because these deposits move directly with Fed funds, the practical beta = 1.00.
|
Period |
Fed Funds |
Overnight Rate (Fed - 0.25%) |
Earnings |
|
1H 2026 |
3.50% |
3.25% |
$162,500 |
|
2H 2026 |
3.00% |
2.75% |
$137,500 |
|
Average |
— |
3.00% |
$300,000 |
That’s a $75,000 drop in annual income.
Now let’s apply it to liabilities.
Step 2: Apply Practical Betas to Deposits
Here’s where things get more interesting.
In a declining rate environment, your cost of funds will also fall—but not everything moves in lockstep. Let’s look at a simplified table of deposit categories and their “practical” betas:
|
Product |
Current Rate |
Practical Beta |
New Avg. Rate (after 100 bp drop) |
|
Checking |
0.10% |
0.00 |
0.10% |
|
Savings |
0.20% |
0.00 |
0.20% |
|
Money Market |
2.50% |
0.50 |
2.00% |
|
Certificates |
4.00% |
0.90 |
3.10% |
How does that work?
Let’s take certificates as an example. A 90% beta means that for every 100 bp decline in market rates, your CD rates drop 90 bp.
You currently pay 4.00% on certificates (CDs).
Current Rate – (Change in Fed Funds x Beta) = New Rate
So, your new average CD rate would fall to 3.10% when market rates decline by 1.00%.
After applying these betas across your deposit base and weighting by balances, your blended cost of funds might fall from 2.33% to around 2.00%, saving roughly $270,000 annually. For time deposits, you’ll also want to consider how quickly your ladder is expected to reprice. For most credit unions, the ladder is made up of primarily 6 and 12 month term certificates, so it should turn over quickly.
Step 3: Bring It All Together
When you blend both sides—assets earning less, liabilities costing less—you get a cleaner picture of how rate cuts ripple through the balance sheet.
This helps you answer questions like: