CUs Ahead of Fed in Raising Rates

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The Federal Reserve last week, overlooking indicators of a slowing of the economic recovery, braved ahead with its strategy to raise interest rates.

"Fed-watching is always a perilous thing," said Bill Hampel, chief economist for CUNA. "But what I think happened is the Fed had previously committed to a policy of pushing rates up and if they had backed away it would have signaled a lack of confidence in the economy."

Instead the Fed, which lifted the target rate for overnight Fed Funds by 25 basis points to 1.25% in June, added another 25 BPs to the benchmark rate for short-term lending, bringing it to 1.50%.

The Fed has been signaling to the markets for months its plans to raise rates in small increments in order to dampen run-away economic growth and to slow inflation. But recent reports of a slowing economy (gross domestic product growth of around 3%) and meager jobs growth-(just 32,000 new jobs added in July), led analysts to suggest the Fed will give pause to its higher-rate strategy.

But others suggested it is too soon to reconsider those plans. "If they were to hesitate that would imply they are reacting to just one month's situation. Normally, the Fed doesn't act that way. It takes awhile for it (rate hikes) to make its way through the system," said Tun Wai, chief economist for NAFCU.

But both credit union economists, who have been predicting incremental rate hikes for the rest of the year, suggested the Fed may pause in its strategy when its Federal Open Markets Committee, the panel that sets rates, meets again in September if the economy continues to slow. "If we get another two months of poor jobs growth the Fed's not going to raise rates again in September," said Hampel.

So far, the Fed's actions have had little impact on credit unions. The June 25 BPs rate hike has succeeded in pushing short-term interest rates, like credit card and car loans, up by around 10 BPs. Home equity loan rates, most closely tied to the Fed Funds rate, have also risen among credit unions by about 10 BPs, according to DataTrac Corp., which tracks rates for 8,000 financial institutions, including 1,000 credit unions.

Long-term rates, like those for fixed-rate mortgages, have been falling since the first of the year and have continued to fall since the Fed's action, according to Greg McBride, an analyst with "Those rates are not so much tied to the Fed's action," he said.

Rates paid by institutions, especially credit unions, on savings products have yet to rise. But some observers say credit unions will need to increase their dividend rates, especially those paid on certificates, if they want to remain competitive, or else risk losing some of the new shares that have flowed in over the past few years. "If the money starts flowing out we will have to raise rates," said Bruce Beaudette, president, Sunmark FCU, Schenectady, N.Y.

The rate rise is seen as benefiting credit unions like Sunmark, which have large portfolios of adjustable-rate loans. The $320-million credit union has $130 million of home equity loans or lines of credit that automatically bump up when rates rise, said Beaudette. "From Sunmark's standpoint, we're very pleased to see the Fed raise rates. We've been really getting crushed on our spreads for the last year," he said.

"Each time the rates go up our whole portfolio (of adjustable-rate loans) goes up by that amount," said Beaudette. "So we've really positioned ourselves well for a rising-rate environment."

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