Federal Reserve raise the federal funds rate by 25 basis points

WASHINGTON–The Federal Reserve’s Federal Open Market Committee has voted to raise the federal funds rate by 25 basis points, moving from a range of 0.25%-0.50% to 0.50% to 0.75%.

At the same time, the FOMC issued revised projections calling for three rate hikes in 2017, three in 2018 and three in 2019. The FOMC will next week Jan. 31-Feb. 1.

In response, economists with the CU trade groups expect the effect on CUs to be minimal, but did indicate credit unions may need to reprice deposits more quickly than anticipated.

“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year,” the FOMC said. “Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee's 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”

The FOMC added that it expects with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further, and that inflation is expected to rise to 2% over the medium term.

“On the whole, the impact of a quarter-point rate hike on U.S. households should be minimal,” said NAFCU Chief Economist and Director of Research Curt Long. 

Long said the FOMC’s economic projections “may hold more interest than the statement itself.” 

“The Fed will not make any assumptions about President-elect Trump’s economic agenda,” he continued. “A large spending bill accompanied by tax cuts certainly has the potential to increase growth and inflation, paving the way for faster rate normalization in the coming years. But the Fed will stick to its wait-and-see approach.”

Perc Pineda, senior economist for CUNA, said of the Fed decision, “A 25-basis point hike in the Federal Funds rate today will affect credit unions in the medium-term. Deposit rates will be re-priced eventually, though not immediately. Credit unions savings rates have stayed well above the rates offered by the banks. Data from Informa Research Services show that the average savings rate at credit unions is 14 basis points higher than average savings rates at banks. Credit unions’ third quarter savings growth was 8.6%--higher than the banks’ 6.7% savings growth rate--suggesting that credit unions’ capital inflow continued strong despite a low interest rate environment.

 “After the 25-basis point hike last year, savings rates at credit unions remained practically unchanged. However, rates of other deposit products such as certificates and money market rose, but not right away. The difference this time is, although the rate hike is moderate, recent economic data are positive, along with signs of higher borrowing cost ahead,” Pineda continued. “We had strong third-quarter GDP growth; an unemployment rate of 4.6% is now below what the FOMC considers longer-run full employment rate, and inflation is on the horizon. The 10-year Treasury yield is moving back to its prior levels. This means that mortgage rates will rise—it is already 50 basis point higher in November than October. Credit unions are not-for-profit service maximizing institutions. Hence, it maintains a reasonable net interest margin to serve the financial needs of its tax-paying-working class members. If the upward pressure on loan rates strengthens in the near-term, credit unions would need to reprice their deposit products much sooner to compensate members the real rate of return on investment.”

CUToday