PLANO, Texas—When the Fed eventually moves to push short-term rates higher it will change the mindset of Americans who have felt “stuck in a rut” on investments for years. And that will put a lot of pressure on deposit rates, something that will pinch net interest margins for a period of time, one analyst is forecasting.
Sarina Freedland, senior investment officer for Catalyst Corporate, predicts that credit unions and banks will have to address consumer expectations on their investments, and ratchet up deposit rates when the Fed moves.
“As soon the headlines go out that the Fed has raised short-term rates, consumers will go into their banks and credit unions and expect to see higher deposit rates,” said Freedland, adding that account holders are keeping an eye on the Fed. “It is different with this rate cycle. Eight years ago most consumers did not even know about the Fed.”
Loan Rates Last To Rise
Freedland contends that most FIs won’t raise loan rates out of the gate, and that the market for assets may begin to see higher rates in six months, or possibly a little longer. That will pinch margins even further for a while.
“Normally, as the economy enters a rising-rate environment, we see the long end of the yield curve move up higher,” said Freedland. “But in today’s economic situation, the level of inflation still is so low, that will keep the longer-term loan rates lower.”
Freedland is among those who believe the Fed will begin raising rates before the end of the year, although she is hedging that prediction a bit, saying a rate hike could be pushed into early 2016 if there are issues in the world economy, she said, expressing confidence in the U.S. economy continuing to grow.
“When rates go up it will be gradual, 25 basis points to start,” she said.
Sarina Freedland, Catalyst
But the real impact to the U.S. economy won’t come from how much rates move as much as it will from the fact rates are finally rising, Freedland said.
“The Fed has been talking about raising rates for a long time, and most people think the Fed needs to start normalizing the interest rate situation, which means bringing up the Fed funds rate from zero. I think this will certainly happen this time. The Fed needs to make the move to show economists and politicians they are ready to normalize interest rates.”
No Major Adjustments
Freedland does not think CUs need to make big changes to their pricing strategies, but recommends vigilance.
“Credit unions need to look around at the financial institutions in their area to see what they are doing,” she said. “They also have to look at their own liquidity situation. If liquidity is tight they may have to raise rates a little sooner. If they have lots of deposits they can afford some runoff.”
Catalyst is ready to help CUs better manage their overnight funds.
“When the Fed stops paying on overnights, which we know is going to happen, Catalyst has created a sweep trading platform,” Freedland said. “The platform will help CUs sweep their funds in and out of their investments. We will release the platform when the Fed stops paying on overnight funds.”