SALT LAKE CITY—One CFO foresees the Fed raising rates toward the end of the year, but questions the motives behind the expected move.
Deseret First FCU’s Derrick Peterson hopes the Fed’s decision to increase rates will be based on the strength of the economy rather than be the result of political pressure.
“I recently attended the CUNA CFO Council meeting,” said Peterson, who is on the council’s executive committee. “As I was coming home I thought about whether there is enough strength in the economy. I don’t know whether the economy has reached the employment and inflation numbers that the Fed talked about years ago that needed to be in place before rates could rise.”
Political Pressure
Peterson believes the Fed feels pressure to simply do something because rates have been so low for so long.
“I hope they move rates for the right reasons,” he said. “It seems like the economy is just plugging along and it’s not the engine it really needs to be.”
As many economists have predicted, Peterson too thinks the Fed will raise short-term rates by 25 basis points.
“Will that kill the economy or help it later this year? I don’t know,” he said. “But I do think the Fed will have to raise rates slowly to make sure the economy can handle the increases.”
Ready For Rising Rates
The $490-million Deseret First is currently positioning its balance sheet for a rising-rate environment.
“We already have a lot of products on the asset side of the balance sheet that help—such as HELOCs that adjust more rapidly, and balloon mortgages,” noted Peterson, who said DFCU feels comfortable on the asset side.
But the credit union’s ALCO committee is evaluating the CD portfolio, and decisions could be coming to promote longer-term offerings, from 36 to 60 months, and possibly raising rates there.
“We may decide to see if we can get more members into intermediate and longer-term CDs,” Peterson said. “We may even add bump CDs to give members some peace of mind.”
Peterson said members have already been shifting slightly to longer-term CDs. “But if the Fed does increase rates, it will be interesting how the membership reacts.”
Hard To Predict Market, Consumer Reaction
With rates being so low for so many years, it is difficult to predict how consumers, the markets and competing financial institutions will react when rates eventually tick up, added Peterson.
As far as a rate hike creating breathing room in margins that have been compressed by the ultra-low rates, Peterson is not sure.
“I would hope it would relax compression a bit. But I think competition for loans is so high right now, and although loans are starting to move more, I don’t know that they are going gangbusters—to the point where the competition would not feel a strong need to compete. Without that kind of high loan activity, there is the chance competitors may keep loan rates down and keep pressure on margins.”