Lenders, borrowers and savers alike all have their financial fates in the hands of The Fed, a body whose recent actions bear explanation.
The Federal Reserve (known informally as “The Fed”) is the central banking system of the United States. It is comprised of representatives from 12 banking regions. Its primary function is to maximize employment and stabilize prices through management of long-term domestic interest rates, known as the Fed Funds rate.
Since the economic troubles of 2008, the Fed has kept a tight lid on those rates. In fact, the Fed Funds rate went unchanged for seven years, locking in at 0% in December of 2008 and remaining there until December of 2015, when it was raised to 0.25%. It spent a year at that rate before being raised to 0.50% at the Fed’s meeting in December of 2016 (they meet eight times per year to review the rate). At their March, 2017 meeting, they raised it once again, this time to 0.75%, the highest it’s been since December of 2008.
This increase means that many loans that tie their interest rates to the Fed rates will adjust upward by 25 basis points. This could directly impact many mortgages and business loans. On the other hand, this rate increase also means that financial institutions might start increasing their deposit rates. Both tend to go hand in hand, but most experts expect that financial institutions will raise deposit rates more gradually than loan rates in order to repair their balance sheets, increase their income, and keep their regulators happy.
Financial institutions make most of their income based on the spread between loan and deposit rates. Since the financial unpleasantness of the previous decade, these spreads have been at historic lows. As the Fed increases rates, the gap between lending and interest rates should increase and allow financial institutions to get back to where they were before the trouble started. Financial institutions were healthier back then due to more typical loan-deposit rate spreads.
Amplify Credit Union is no exception to the rule; we, like all the other financial institutions who survived the Great Recession, are in that same situation. While we look forward to increasing the interest payments for those who have money on deposit with us (it’s been a long time coming, and our members deserve it), we must also manage our financial statements and meet regulatory requirements.
Therefore, our plan is to gradually raise deposit rates as the Fed increases national rates. We don’t want to rush into anything and then have to reduce the rate later because we acted without considering the consequences. Our rates will continue to be competitive. Amplify Credit Union’s goal is to offer deposit rates that are in the top quarter of the local market. We will also continue to offer certain market-leading CD and Money Market promotions on a daily basis.
The Fed raising the Fed Funds rate in two consecutive meetings is something that has not happened since June of 2006, so this is territory that has not been familiar for some time. You can trust Amplify to closely monitor the effects of this return to a more active Federal Reserve and to react responsibly to their decisions.