WASHINGTON — The Federal Open Market Committee agreed unanimously Wednesday to raise the federal funds rate by 25 basis points, a move that was widely anticipated by markets. The committee's expectations for interest rates in 2017, however, were more varied.
Six members expected three rate hikes next year, with another four anticipating only two. Two other members said they thought that only one additional increase would be warranted in 2017, while the remaining four members anticipated a more aggressive policy, with year-end rates between 1.625% and 2.125%. Thirteen of the seventeen members said they expect the longer-run rate to settle between 2.75% and 3%.
The committee also decided to continue to reinvest principal payments on agency debt and mortgage-backed securities and to roll over its maturing Treasury securities "until normalization of the level of the federal funds rate is well under way."
Impact on CUs
According to Perc Pineda, senior economist at the Credit Union National Administration, the Fed's move will impact credit unions "in the medium-term," leading to eventual re-pricing of deposits (though he noted that CU savings rates remain on average 14 basis points higher than those offered by banks).
"Credit unions' third quarter savings growth was 8.6% — higher than the banks' 6.7% savings growth rate — suggesting that credit unions' capital inflow continued strong despite a low interest rate environment," said Pineda, adding that savings rates at CUs remained virtually unchanged following last year's 25 basis-point increase.
"However, rates of other deposit products such as certificates and money market rose, but not right away," he noted. "The difference this time is, although the rate hike is moderate, recent economic data are positive, along with signs of higher borrowing cost ahead. We had strong third-quarter GDP growth; an unemployment rate of 4.6% is now below what the FOMC considers longer-run full employment rate, and inflation is on the horizon. The 10-year Treasury yield is moving back to its prior levels. This means that mortgage rates will rise — it is already 50 basis point higher in November than October. Credit unions are not-for-profit service maximizing institutions. Hence, it maintains a reasonable net interest margin to serve the financial needs of its tax-paying-working class members. If the upward pressure on loan rates strengthens in the near-term, credit unions would need to reprice their deposit products much sooner to compensate members the real rate of return on investment."
Curt Long, chief economist at the National Association of Federal Credit Unions, suggested that the quarter-point increase will have a minimal impact on U.S. households, and suggested that rising rates could play into credit unions' hands.
Consumers, he said, "may find that even in a low-rate environment there are institutions willing to provide superior rates and higher quality service than the big Wall Street banks."
There has been much speculation since the November presidential election about how the Fed and President-elect Donald Trump will play off of one another, and Long noted that the monetary board "will not make any assumptions about [Trump's] economic agenda. A large spending bill accompanied by tax cuts certainly has the potential to increase growth and inflation, paving the way for faster rate normalization in the coming year. But the Fed will stick to its wait-and-see approach."
Brian Turner, president and chief economist of Meridian Economics LLC in Plano, Texas, characterized the rate hike as “welcome news” for credit unions, citing that their earnings streams have been eroded by the protractedly low interest rate environment.
“The higher overnight target rate improves the total return profile of surplus funds adding anywhere from 3 to 6 basis points to [return on assets] – an outlook that could see that return multiple by the end of 2017,” he elaborated. “It also is expected to have no effect on current non-term shares – which comprises about 73% of credit union funding.”
However, Turner cautioned that higher interest rates will have “very little impact” on consumer loan rates – at least for the next few months, as market demand for financing has been moderate. Moreover, the Fed’s optimistic outlook for economic growth and employment sector improvement suggests that credit risk exposure should also improve in 2017 after seeing loan delinquency increase substantially from the first quarter to third quarter. Still, Turner added that credit unions should “remain cautious” before “entertaining any vigorous program” of issuing sub-B+ paper quality until there is “more solid confirmation” of the recovery.
The big question for credit unions now is when the next rate hike will come — and then the one after that. Indeed, the Fed Board's mixed predictions on how many times rates will rise in 2017 reflects
Improved Projections
The FOMC's revised economic projections were generally improved over the September forecasts, with unemployment estimated down to 4.7% from 4.8% and GDP growth up from 1.8% to 1.9%. The committee also revised its estimates for personal consumption expenditure inflation to 1.5% from 1.3% — a highly-anticipated indicator that Yellen and other FOMC members have said is a major precondition for raising rates. Core inflation — that is, inflation figures that control for food and energy prices — remained at 1.7%.
Federal Reserve Chair Janet Yellen said that, though unemployment remains low and inflation figures have risen closer to the 2% target rate, the committee remains convinced that accommodative economic policy is necessary.
"In light of the current shortfall of inflation from 2%, the committee will carefully monitor actual and expected progress toward its inflation goal," Yellen said. "The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."
The rate hike was widely anticipated in the marketplace. During the September FOMC meeting three members dissented from the majority opinion to keep target rates at 0.25-0.5% — an unusually high number. Following the election of Donald Trump to the presidency and his fellow Republicans to majorities in both houses of Congress, stock markets have reach new highs, further raising expectations that the Fed might seek to cool markets down to stave off rapid inflation.
– Aaron Passman contributed to this report.
