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Fed Raises Interest Rate for Only the Second Time in a Decade
Thursday, December 15, 2016 6:45 AM

As expected, the Federal Reserve raised the federal funds rate on Wednesday by a quarter of a percentage point, moving from 0.25-0.50 percent to a range of 0.50 and 0.75 percent. According to Perc Pineda, senior economist at the Credit Union National Administration, a 25-basis point hike in the federal funds rate will affect credit unions in the medium-term. Deposit rates will be re-priced eventually, though not immediately.

"Credit union savings rates have stayed well above the rates offered by the banks," Pineda said. "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 percent—higher than the banks’ 6.7 percent 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,” Pineda added. “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.

"We had strong third-quarter GDP growth; an unemployment rate of 4.6 percent is now below what the Federal Open Market Committee 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 points 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.

“If the economic expansion picks up pace and the Fed raises rate aggressively next year, then credit unions would adjust rates accordingly.”