Will the Federal Open Market Committee raise interest rates when it convenes in December?

Todd Harris, president/CEO of $2 billion asset Technology Credit Union in San Jose, Calif., believes it will.

Such an increase has the potential to further stress credit union net interest margins, he says.

Harris recently discussed his thoughts on a possible rate hike with Credit Union Magazine.

CU Mag: Why do you think the Federal Reserve will raise rates in December?

Harris: The Fed will likely raise rates by 0.25% in December because it worked last December and the Fed loves routine.

The holidays were a sufficient distraction for both business and the general public, and nothing lastingly adverse happened as a result of the rate hike.

There may also be one additional interest-rate increase prior to July 2017. Keep in mind that 0.75% and 1% are still very accommodative.

At this point, the Fed’s primary goal for increasing rates is not to control inflation but rather to create room to cut rates in the future in case of an economic slow-down.

CU Mag: What might this mean for CUs?

Harris: A rate 0.25% increase—or especially two—has the potential to put further strain on credit union and bank net interest margins.

The primary reason is the Fed only wants to raise short-term rates. They would prefer long-term rates to remain low so real estate values can be preserved.

As a result, they will maintain the balance levels they accumulated from quantitative easing for the foreseeable future. It is the further flattening of the yield curve that will put additional pressure on net interest margins.

When the Fed raised the federal funds rate last time, there was very little market impact on loan or deposit rates.

However, with each successive increase, pressure will build to increase deposit rates during a time when the market has come to expect rock-bottom loan rates.

In contrast, most institutions will be loath to increase deposit rates unless they can also increase loan rates. This will be an interesting dynamic to watch play out.

CU Mag: How is Tech CU preparing for the possibility of a rate hike?

Harris: Technology Credit Union has been girding for a rate increase for the last five years. As a result, we have tended to originate, acquire, and retain shorter-duration assets and tended to sell and divest in longer-duration assets subsequent to their origination.

This approach has cost us earnings over the last five years. But as a result we have a balance sheet and net interest income projections that are fairly resilient, even in a flattening yield curve scenario.

In our minds, the earnings trade-off was well worth it because it allowed us—and will continue to allow us—to stay engaged with our members, and provide them with the products and services they want and need regardless of the interest-rate scenario the Fed creates.