Going up? Fed interest rate decision expected this week

After dusting off his crystal ball, Randy Summers offered what seems to be the standard response to the question of whether the Federal Reserve will raise interest rates this week:

“I have no idea what they will do,” said Summers, a senior vice president at Sunflower Bank. “If I knew that answer, I guess I’d be smart enough to be on the Federal Reserve board.”

With an announcement about any possible action expected early Thursday afternoon following the scheduled two-day meeting this week of the Federal Open Market Committee, the consensus among financial pundits seems to be ambiguous, though more people may be hopping on the no-increase bandwagon, according to some in the financial industry.

“Back in June, economists thought there was about an 80-something percent chance the Fed would raise rates in September,” said Brian Chamberlin, president of Andover State Bank. “Now, from the information I look at every day, it’s less than 50 percent.

“I’ve been telling people for six months that the Fed isn’t going to raise rates, and I still believe that. I don’t think we’ll see a rate change this year.”

The Fed funds rate – essentially the rate that banks charge each other for overnight loans – was last raised during the summer of 2006. It has been near zero since the financial crisis that began in 2008. The rate was over 5 percent when the Fed began a succession of cuts late that year.

Led by a governing board, the Federal Reserve is a collection of monetary institutions across the country that serves as the central banking system in the U.S. with the mission to keep the ship that is the U.S. economy sailing along smoothly.

Experts agree that any upward rate move this week would likely be small – perhaps 0.25 percent – though it would have an effect on both lenders and consumers.

“A jump would basically mean a rise in rates for everything from car loans and mortgages to business loans,” Chamberlin said. “I don’t think the Fed has a big incentive to do anything now.

“If I were president of the Federal Reserve, I would let what’s happening in China and in the Asian markets play out. At some point in time, the rate will go up, but the Fed doesn’t want to go up and then have to ease back again because of something that happens in the world markets.”

While a rate spike could affect large banks differently than the smaller community banks, Chamberlin said he thinks more banks than not are rooting for an increase. Part of the indecision, he said, revolves around the U.S. economy’s steady – though slow – recovery from the 2008 recession.

“We’ve had a bull market since March 2009,” Chamberlin said. “You’d think our economy would be much stronger than it is, but that isn’t the case. I just don’t see it.”

Malcolm Harris, a professor of finance at Friends University, said the time has long since passed for the Fed to make a move. He and many others think money has been too cheap for too long a period.

“If they don’t do it during this meeting, they certainly will at their December meeting,” Harris said. “It’s been much too long.

“It’s creating bubbles now in things like the venture capital valuations of new start-ups, and there are dozens of companies that haven’t done much of anything that are valued at a billion dollars, which makes no sense.

“I think the best thing to have done would have been to raise interest rates six years ago, but they’re not asking me.”

On the banking side, Fidelity Bank executive vice president Mark Sikes said a small rate bump wouldn’t have much of an impact, aside from the psychological affirmation that the rate is moving again.

“Overall, a quarter of a percent move would do very little,” Sikes said. “You might see a tick up on deposit rates and a very small increase in loan rates, but, in many cases, there will be no impact. I wouldn’t expect any slowdown from a loan perspective from a (.25) Fed increase.”

For people who count on drawing interest off of savings – many of whom may be on fixed incomes – a rate increase would signal the potential end of years of flat returns, said Mark Keeny, CEO of Citizens Bank of Kansas.

“An increase would be better for people who are savers,” Keeny said. “We see that with some of the older folks in our markets who rely quite heavily on interest income. They haven’t had that in several years.”

With regard to market reaction, Keeny said he would expect some movement on Wall Street following a hike, but that other segments of the market wouldn’t be startled.

“The Fed started talking about this back in May and June,” Keeny said. “Once they did that, the bond market – I mean everything from overnight funds to short- and long-term treasuries – effectively priced a Fed move of a quarter point into the bond market.

“I don’t think we’ll see volatility in that market, though we could see some volatility in the equity market if they raise. We’ve already seen some of that in the past few weeks, but I think it’s a non-event if they do a quarter (percent) or if they don’t do anything.”

After this week’s meeting, the Federal Open Market Committee is scheduled to meet again in October and in December, according to the Federal Reserve website. The Fed can, however, raise or lower the funds rate at any time.

“What any of us think is just pure speculation,” said Summers, the Sunflower Bank official. “If they raise, I think the effect will be psychological more than anything.

“Maybe it’s better to do it, get it over with and let the world settle down again.”

This story was originally published September 16, 2015 at 5:21 PM with the headline "Going up? Fed interest rate decision expected this week."