A host of questions lie before credit unions – and the rest of the financial world – regarding whether or not the Federal Reserve will hike its benchmark interest rate.
Federal Reserve Chair Janet Yellen suggested recently that the central bank could potentially hike the federal funds rate later this year, citing modest inflation, low unemployment and a gradually improving U.S. economy.
"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said during a speech in Jackson, Wyoming.
However, Yellen did not provide a concrete timetable, meaning if the Fed does indeed pull the trigger this calendar year, it would have to take place during one of the next three scheduled Fed meetings: in September, November or December.
The Fed is unlikely to boost rates at the November meeting (since that would occur just days prior to the U.S. presidential election and the October jobs report) -- leaving September or December as the most probable periods when a rate hike might be enacted.
In December, the Fed indicated it could possibly hike rates as many as four times this year, but that was scaled back in the wake of global economic events that intensified uncertainties, including the slowdown in China, dropping crude oil prices, a poor jobs report in May and, perhaps most unexpectedly, Great Britain's vote to quit the European Union (a.k.a., Brexit).
Yes, Hike!
Ralph Monaco, chief economist at the National Credit Union Administration, said the Federal Reserve has repeatedly said it will be patient in raising rates, when it thinks it is appropriate to do so. "That suggests modest increases in rates, when they start moving the target higher," he said. "That's consistent with increases in 25-basis-point increments. NCUA's overriding view is that credit unions need to be prepared for a wide variety of interest rate outcomes, since the outlook for interest rates depends on the outlook for the economy, and the outlook for the economy is uncertain."
Curt Long, chief economist and director of research at National Association of Federal Credit Unions (NAFCU), said he expects a rate hike at "some point this year" – possibly as soon as September. Long cited, among other things, that several Fed officials have already stated publicly that a September rate increase is on the table.
Such an increase, whenever it hits, would involve a 25 basis point boost.
Joe Newberry, president and CEO of Redstone Federal Credit Union, a $4 billion institution based in Huntsville, Ala. said he believes the Fed may wait until December to raise rates because there "seems to be little urgency" to do so this month [September]."
Dwight Johnston, chief economist at the California and Nevada Credit Union Leagues, noted that
"But if the Fed delays in September, we're really back to square one," he cautioned. "A move in December would then depend on the next two months of data as well as turmoil around the elections."
With respect to the election, Johnston commented that the Fed would likely not hike rates in early November because it would want to wait for the October payroll report – not necessarily due to the election itself.
Even with the "soft" August jobs report, Perc Pineda, senior economist at Credit Union National Association (CUNA), believes a Fed rate hike is "still on the table" since further declines in the unemployment rate would not be significant as the economy approaches full employment. "A fed funds rate hike is more likely in December than in September, when the Fed has a better reading of inflation," he added.
However, what complicates matters is that inflation remains modest and the unemployment rate (despite the weak jobs report last week) is still low.
"[This] is causing so much disagreement among [Fed] officials," NAFCU's Long stated. "If the labor market was weaker, there would be a consensus that we need more monetary stimulus to support the economy. On the other hand, if inflation was stronger, there would be a greater urgency to raise rates in order to prevent the economy from overheating. As it is, you have one side arguing that there is no urgency with inflation being so low, so why not keep rates lower longer? The other side would argue that the strength of the jobs market suggests that inflation will strengthen soon, and we need to raise rates now in order to prevent inflation from getting out of control down the road."
The Federal Reserve is very clear about its dual mandate of maximum employment and price stability, NCUA's Monaco observed. "While the unemployment rate is nearing what many economists think is a full employment level, the inflation rate remains below the Federal Reserve target," he added. "That said, the Federal Reserve has indicated that its primary concern with inflation is about where the inflation rate is heading, not where it currently is. That's because it takes some time for interest rate changes to affect the economy. As the Fed has repeatedly indicated, if it thinks the inflation rate is going to move appreciably above their target and the unemployment rate continues to fall, it is more likely than not to lift the federal funds rate target."
No Hike This Year?
But not everyone is convinced the increase will come during 2016.
Brian Turner, president of Meridian Economics LLC in Plano, Texas, said "The Fed has already been stung by a series of false starts in 2016, so the markets remain cautious about the likelihood of a September rate hike. Should they lose any strength in job growth, we might not see any move under early 2017."
G. Michael Moebs, economist & CEO at Moebs Services in Lake Forest, Ill, does not see any evidence for a rate hike at all this year. Moebs cites, among other things, the U6 unemployment rate (the real unemployment rate, which includes those who have given up looking for work) is at 9.7%, while productivity measures are all pointing down.
Since Yellen took over as Fed Chair in January 2014, monetary growth has averaged 5.25%, which is only 70% of normal growth, Moebs said. "Just in these measured mentioned there is no justification of rate hike," he added. "Any rate hike now or until the very end of the year would be foolish."
But Turner also said that it does not really matter if the fed hikes in September or in December. Neither rate increase will have an impact on boosting the recovery, now in its seventh year. The economy has seen a modest 2.2% average growth pace over that time, a far cry from the average 5.3% experienced during past recoveries.
The main challenge facing the FOMC, Turner asserted, is to balance the need to raise short-term interest rates in order to raise investment returns with the potential that higher rates could shut down consumer spending behavior, already creeping along a tepid 3.5% growth rate.
"We have already seen short-term rates increase about 20 basis points over the past year, but average consumer rates (credit cards, vehicle loans, student loans) are virtually unchanged," he indicated. "This could easily continue even in the face of rate hikes in 2016, narrowing relative pricing spreads to benchmark rates over the subsequent six months."
Johnston also pointed out that the weak August jobs report might not matter in the long run. "This is just one month's number," he said. "May's weak number turned out to be an aberration. The Fed will look at this number, but one month means nothing about what the Fed will do as the year progresses."
NAFCU's Long added that "simply put, this [August jobs] report is not enough to compel the Fed to raise rates in September, and the focus will shift to December as the most likely date for the next rate hike."
