Although members of the Federal Reserve's Federal Open Market Committee (FOMC) decided the keep the fed funds rate unchanged at the close of its two-day policy meeting on Wednesday, some credit union advocates believe that the language contained in the Fed's statement — as well as the economic backdrop in the country — strongly suggests a rate hike is coming soon.
Bill Hampel, chief policy officer at Credit Union National Association (CUNA), said in a statement that an increase in the fed funds target rate would have been "consistent" with an economy "approaching" full employment with "moderately" rising inflation. Therefore, he added, an increase by the end of the year is "very likely," to be followed by "further increases" next year.
Similarly, Curt Long, chief economist at National Association of Federal Credit Unions (NAFCU), said the committee sent a "strong signal" that a rate hike is "imminent," noting that three governors (Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren) dissented on the vote, signaling divisions on the board. The latter three members sought to boost the target range for the federal funds rate to between 0.50% and 0.75%.
"It seems clear that barring a major setback a rate hike is coming before the end of the year," Long stated.
Hampel added, however, that a return to "normal" rates will take "several years."
"Higher short-term interest rates will provide welcome relief to savers, and should present no problems for credit unions," he assured.
In its official statement, the FOMC noted that U.S. economic activity has improved and that gains in employment have been "solid" in recent months.
"The case for an increase in the Federal Funds rate has strengthened," the central bank explicitly stated, "but [the Committee] decided, for the time being, to wait for further evidence of continued progress toward its objectives."
The FOMC last raised the Federal Funds target rate to a range of between 0.25% to 0.50% in December 2015 (after keeping them near zero for almost a decade, an unprecedented duration of time).
Speculation has run rampant since then that the central bank would enact rate hikes in response to an improving economy and better employment numbers.
Paving the Way?
Brian Turner, president and managing director of Meridian Economics LLC said the Fed’s announcement “paves the way for at least” a 25 basis point hike at its December meeting.
Turner suggested that, in light of the recent decision by the central bank, credit unions should continue to protect their credit risk exposure over the next few quarters by limiting their loan originations below B+ quality.
“It’s better to take a little less current yield from stronger credit quality than risking what could be significant loss exposure from default should the economy take a downward turn in 2017,” he said.
In addition, Turner noted that with the likelihood that overnight rates could be “slightly higher” over the next few months, income statements will benefit more from the higher return on cash than from any marginal investment in certificates or securities that also require longer investment terms in a rising rate environment.
The Fed next meets on November 1-2, just days before the general election.
