WASHINGTON (12/17/15)--Confident in both the direction of the labor market and the prospects for inflation, the Federal Reserve Wednesday raised interest rates for the first time since before the financial crisis--a move that will have a subtle effect on credit unions.
The Fed has kept interest rates pinned at their near-zero levels since the downturn in an effort to catalyze economic growth. But with the economy finally waking from its lethargy, the Fed made the decision to bump up the target range for the rate to 0.25% to 0.5%, a slightly less accommodative policy position than before.
However, “the stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2% inflation,” said the Federal Open Market Committee (FOMC), which sets monetary policy for the Fed.
As for what this means for the credit union movement, Mike Schenk, CUNA vice president of economics and statistics, told News Now that the increase should hit credit unions more softly than previous rate hikes.
“Historically, when the Federal Reserve increases its benchmark federal funds interest rate target, depository institution earnings decline,” Schenk said. “This time around, expect the effect to be less pronounced. That’s due mostly to the fact that the Fed is likely to be more restrained in its rate increases.”
In its policy statement, the FOMC said it expects economic conditions to evolve in a manner that “will warrant only gradual increases in the federal funds rate.”
Looking forward, based on federal funds rate futures trading, Schenk expects the rate to end 2016 at 1%, which translates to one rate increase every other FOMC meeting next year.
“This could mean that funding cost pressures will not be felt quite so fast this time around,” he said.
“Bottom line: This environment should be favorable for credit union operations,” Schenk added. “Expect credit union membership and loan growth to stay at lofty levels. That relatively strong loan growth will combine with higher employment and increasing incomes to boost credit quality. Healthy (though marginally lower) bottom-line results should be evident at credit unions in 2016.”
The FOMC will next meet Jan. 26-27.