WASHINGTON–After more than a year of predictions it would do so, and after seven years of near 0% rates, the Federal Reserve raised its Federal Funds rate from a range of 0% to 0.25% to a range of 0.25% to 0.5%.
With inflation below the Fed’s target rate and with the unemployment rate near 5%, the move has long been expected.
“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the (Federal Open Market) Committee decided to raise the target rate for the federal funds rate to ¼ to ½ percent,” the FOMC said in a released statement.
The Fed has not raised rates since 2006, prior to the launch of the Great Recession. Analysts are again predicting the Fed will increase rates during 2016, as well.
During a press conference, Fed Chair Janet Yellen said the move by the Fed “marks the end of an extraordinary seven year period.”
She said “considerable progress” has been made toward restoring jobs in the U.S. and reducing the hardships being felt by many Americans, adding that the FOMC is confident the economy will continue to strengthen. Yellen noted that a rate increase was judged to be “appropriate.”
The Fed chairman added that while developments abroad still pose risks to American economic growth, these risks seem to have lessened since last summer.
CUNA's senior economist, Perc Pineda, there are three things to keep in mind given the Federal Reserve’s policy move:
1. "The rate hike has a strong signaling effect that the U.S. economy is on solid ground and will positively impact savings and investments leading to higher GDP growth. If the long-term expectations of the household and business sectors are upbeat, we could be seeing higher growth moving forward. Savers have long been disadvantaged by lower rates of return for seven years. The Fed is convinced that capital is no longer allocated efficiently at the current rate. Rightfully so, it is necessary to raise the guideline rate. It is important to keep in mind that what matters is the equilibrium real rate of interest – the interest rate when the economy is at full capacity. Since GDP growth and credit union loan growth are positively correlated, higher rates will have a net positive effect on credit union lending. The current trends of rising loan growth and savings growth at credit union are expected to continue."
2. "Will the rate hike hurt U.S. economic growth? The Answer is no since it is not expected that subsequent hikes will be aggressive," said Pineda. "A Fed rate hike affects the short-term rates and will not stonewall economic expansion. Raising rates by 25 basis points initially – with ample time for the next rate hike – it not going to slow down economic activity and not cause disruption in capital markets. The interest rate risks that credit unions face are minimal considering that for the third consecutive year, long-term assets as a percentage of total assets have been falling."
3. "As short-term rates rise the yield curve will start to flatten and net interest margins at credit unions will taper," Pineda said. "However, we do not expect short-term rates to rise dramatically. Hence, long-term treasuries will remain attractive cushioning interest rate margins. Credit union on assets will be marginally lower relative to prior years. However, as the economy continues to growth, and job prospects are better, credit risks and asset quality will continue to improve. The loan growth momentum this year is expected to continue next year supporting interest margins."
NAFCU Chief Economist Curt Long said that Wednesday's announcement confirms what the trade association has anticipated for some time. "Looking ahead, the Fed will look to adopt a more gradual pace to rate normalization than it did a decade ago. As far as credit unions are concerned, our forecast is for continued growth in lending in 2016. Households are in a strong position with low unemployment, falling gas prices, low debt service costs and early signs of wage growth.
“Regardless of the rate environment, credit unions will continue to thrive, and our forecast is for continued growth in lending in 2016,” concluded Long.
Other responses to the Fed hike:
* The credit union industry is poised for continued growth during a time of rate increases, according to data prepared by Callahan & Associates.
“When looking at the last period of Federal Reserve initiated interest rate increases we see that credit union lending accelerated driving interest income higher,” the company said in a statement.
“With lending accelerating it gives the industry the ability to re-price their loans,” said Jay Johnson, EVP and Partner at Callahan & Associates. “Credit union CEOs and CFOs have been focused on asset-liability management and interest rate risk putting them in a great place as rates start to increase.”
Callahan’s noted that the net interest margin is stable, hovering at 2.86%, up one basis point from a year ago.
From an investment perspective, price risk is minimal and available-for-sale (AFS) as a percentage of total investments has been increasing, providing credit unions with greater flexibility and balance sheet liquidity in asset-liability management, Callahan’s said.
* Brian Turner of Meridian Alliance said the Fed’s move signal that further rate hikes will come with “only gradual increases” as the economy gives clear indication it is strengthening and core inflation rises. “Some analysts expect the Fed to raise rates at every other meeting in 2016, a total of four quarter-point moves,” Turner noted, while others believe the Fed could wait until June of 2016 before moving again.
Either way, said Turner, “Don’t expect subsequent increases in mortgage or vehicle loan rates for awhile. Other loans, like credit cards and home equity credit lines could see slight increases over the next few weeks depending on how modest future rate hikes might be. Bond yields are relatively unchanged following the announcement - a function of already valuing in the move."