Bankers are reacting to the first Federal Reserve rate increase in nine years with a combination of relief, anticipation and caution.
The central bank, as expected, on Wednesday raised the benchmark federal funds rateby a quarter percentage point from near-zero levels.
On the eve of the Fed move, selected executives from small and midsize banks answered a series of questions from American Banker about its potential impact on banking and the broader economy, how they planned to react, and their predictions about the Fed's plans for next year.
The bankers generally said they are ready for rising rates though others many not be, and disagreed on how much the initial increase would help or hurt lending and general economic conditions. Several anticipate more rate boosts next year.
The following is edited for length and clarity.
How much does your business change starting tomorrow? How do you plan to react, if at all?
SCOTT ANDERSON (chief economist, Bank of the West, $93 billion of assets): I don’t think [the rate increase Wednesday] is going to be a big change for borrowers or for the economy.
JIM CHERRY (chief executive, Park Sterling, $2.5 billion of assets): We would not expect any change in business the next day. … We would expect to begin seeing some positive impact from earning assets tied to floating rate indices as those assets reach repricing dates, though much of the anticipated 25-basis-rate increase already appears to be priced in one-month Libor at this point. We would also expect to see an increase in wholesale funding costs and possibly some short-term retail time deposit pricing, but would not anticipate any immediate change in other deposit costs such as interest checking or money market accounts.
STEVE BROWN (president and CEO, Pacific Coast Bankers' Bank, $794 million of assets): It should be good for floating-rate loans, but rates need to move higher, so hopefully the Fed keeps going. Our community bank clients are hopeful for more increases to help boost returns. It should be helpful to community banks but incremental probably, given comments already out there by Fed.
DOROTHY SAVERESE (president and CEO, Cape Cod Five Cents Savings Bank, $2.9 billion of assets): We are watching the financial markets closely. Mortgage rates move every day and the prime rate does not, and has not for many years. There’s no certainty that the Fed action will result in higher long-term Treasury and mortgage rates, and there’s no question that the bond market has already priced the 25-basis-point increase into the short end of the yield curve. We monitor long-term rates in real time in order to efficiently run our secondary-market operation and although the financial and economic news has created volatility in long-term rates, we don’t expect this to be a parallel upward rate move. We have been modeling numerous scenarios and preparing our balance sheet for a variety of potential interest rate scenarios.
Do you think this change will foster or chill lending? The housing market? The economy? What will it do to deposits?
DICK EVANS (chairman, president and CEO of Cullen/Frost Bankers, $28.3 billion of assets): Normally, when rates increase, volumes increase, but because of the time we’ve been at a zero interest rate, it will have little effect on lending. It will have zero impact on housing markets. The Fed’s action in finally raising rates are will likely result in little change [in the economy] because of the lack of leadership in Washington D.C. [It will do] very little [to deposits].
ANDERSON: There will be some chilling impact. … Mortgage rates will start moving higher. That’s going to take some of the expansion potential away from 2016. … Some big-ticket items, like autos and houses, you might see relatively bigger impacts. … Deposit growth has been quite strong so far. We’re not too concerned at this point. Banks might have to start paying up a little bit more for deposits.
SAVARESE: It will largely depend on the pace of rate increases. The housing market has seen a somewhat uneven recovery, supported by accommodative rates, and economic data has been mixed. The lack of inflation, declining workforce participation and stagnant wage growth continue to be areas of concern. The Fed has emphasized a cautious and gradual approach as they begin to raise rates.
Are you planning for further rate increases next year? If so, how many and how much?
CHERRY: We would expect two to three additional increases in 2016 in 25-basis-point increments, likely in the second half of year if no economic setbacks occur beforehand.
ART JOHNSON (chairman and CEO, United Bank of Michigan, $514 million of assets): We’re not making any interest rate bets for next year. We’re fortunate to have very high loans-to-assets ratios, so we can match fund as we go along.
BROWN: We are expecting 100 basis points of increases in 2016, which would be good for us and for our community bank clients.
ANDERSON: We think there are going to be several additional rate hikes next year [starting in April, each of a quarter percent].
SAVARESE: Market consensus seems to be for one to three additional rate increases of 25 basis points during 2016. Ultimately, there are so many factors in our global economy that could influence this.
Is this good or bad for you, on balance?
CHERRY: Neutral to mildly positive short term and positive long term.
JOHNSON: A strong economy should be like a rising tide, lifting all boats. The only exception would be banks that made interest rate bets in the wrong direction or too late in the game.
ANDERSON: I think banks in general are positioned for higher short-term interest rates. … We’re ready. We think the economy’s ready.
SAVERESE: Ultimately, our business is a function of the overall economic environment and interest rate movements within the context of that economic environment. I'm cautiously optimistic that a rising rate environment would be reflective of a strengthening economy. In the short-term, banks will experience some margin pressure as liabilities generally reprice quicker than assets.
Kevin Wack contributed to this article.