The Federal Reserve announced Wednesday it will raise the Federal Funds interest rate target. CUNA Vice President of Research and Policy Analysis Mike Schenk says credit unions can expect an economic environment supportive of member engagement and favorable operating results.
“As expected, increasing concern over tight labor markets and the related risk of rising inflation pressures caused the Federal Reserve to increase the Federal Funds interest rate target today. Also, as was widely anticipated, the increase was modest – a 0.25% move - bringing the target range to 1.00% to 1.25%," he said.
“Policymakers shrugged off two data releases earlier in the day – one showing unexpectedly weak retail sales in May and one showing slower inflation – which had some wondering, in the final hours, if the move most expected would be put off. Despite the weakness reflected in those releases however, the Fed sees consumers as generally upbeat and engaged. Healthy labor markets are fueling personal income gains and boosting confidence. And while weak in the month, retail sales are up a bit more than 4% on a year-over-year basis. Housing markets also reflect healthy activity and equity markets reflect solid gains and are bouncing around near all-time highs.
“Still, policymakers are proceeding with caution. Expectations of economic stimulus arising from tax cuts and from increased federal infrastructure spending were baked in to most economic forecasts earlier this year. However, with each passing day, both tax reform and additional spending on roads, bridges, and the like seem less certain. Fed decision makers will undoubtedly be following developments on this front very closely.
“The Fed’s FOMC statement suggests one more quarter-point increase in 2017 and three quarter-point moves in 2018. In addition, policymakers re-affirmed expectations to begin implementing a balance sheet normalization program this year.
“In any case, the Fed’s go-slow approach means credit unions can expect the economic environment to be broadly supportive of more member engagement and of generally favorable operating results. More credit unions are apt to feel the pinch of higher market interest rates, but CUNA economists see healthy membership growth, solid loan growth, higher asset quality, and generally favorable earnings results in the coming months,” Schenk said.