For New Jersey Bankers CEO and President John McWeeney Jr., the Federal Reserve’s announcement that it is raising short-term interest rates is somewhat of a reason to be happy.
At least, if you’re in banking.
In a recent interview with NJBIZ, McWeeney described the lay of the land in terms of what the announcement means for lenders, and how the next few months may play a role in the future of the economy.
NJBIZ: In your experience, how does the banking sector react to a change in interest rates?
John McWeeney: Typically, when short-term interest rates rise, that can give a bit of a boost to bank revenues because they hold a lot of cash themselves, the Fed, and they’re going to get a greater return on those monies.
Normally, when short-term interest rates rise, longer-term interest rates rise as well, and that would help the bank’s net interest margins, the difference between what they’re earning and what they’re paying for money.
In the current environment, long-term rates really haven’t moved up too much. That interest margin, while it has been slightly better, hasn’t improved as much as it might in a more normal environment where long-term rates are rising.
Generally speaking, higher interests are beneficial to bank earnings. The rate they earn on their own monies goes up, the interest they charge on loans will go up, but at the same time, it may not happen immediately.
Over time, the cost of deposits will gradually rise as well for the monies they bring in.
It’s beneficial. It’s not huge, but it is beneficial. It should help bank earnings.
What would help more is if we started seeing a rise in longer-term interest rates. As the rate between longer-term and shorter-term increases, that could help the bank’s interest margins and be beneficial.
NJBIZ: Does it seem like something it may happen in the coming years?
JM: Generally speaking, people are a little bit surprised that longer-term rates have not moved up higher as the Fed has raised rates. That’s primarily because inflation hasn’t moved up much. There was one dissenting vote, one of the Fed presidents against raising rates, but they are still forecasting — that was the second interest rate (hike) this year — they are still forecasting one more this year, and the majority of the voting Fed presidents and governors are anticipating three rate increases next year. At some point in time, we’re going to start seeing longer-term rates go up, which is kind of a double-edged sword.
On one hand, the spread will certainly improve. On the other hand, eventually, as long-term rates go up, it should start to suppress demand for loans because the price goes up.
NJBIZ: Does that mean short-term loan demand will not really change?
JM: I don’t think this rate increase is going to have much impact on borrower demand, because interest rates are still at historically low levels.
NJBIZ: In your experience, how do these forecasts from the Fed usually play out? Does it usually follow through with the number of raises it anticipates?
JM: This year, they (the Fed) are. They had anticipated three rate increases, and this is the second one. It seems they are still pointing towards one more towards the end of the year.
In 2018, the majority of the Fed voters are saying three more next year. It’s a 25 basis-point increase, so it’s not a gigantic increase, but it is slow and gradual.
The other thing that came out of the meeting, they started to talk about a plan to shrink the size of the Fed balance sheet.
Since the financial crisis, they had dramatically grown their balance sheets by purchasing securities and Treasuries, and that put a lot more liquidity in to the marketplace. Now, they’re talking about, probably as we move towards the second half of this year, starting to not repurchase or renew those securities and let their balance sheet start to shrink and remove liquidity from the marketplace to make sure we don’t get inflation. Although so far, inflation has been pretty muted.
NJBIZ: Will these short-term changes in interest rates tend to affect different market sectors disproportionately?
JM: Consumer mortgage rates are more of a long-term commitment. The rates tend to be a little bit higher than borrowing a shorter-term loan. … But they’re still very, very low by historical standards.
What I hear anecdotally by our bank members is that loan demand is still pretty strong and the competition for loans between banks and other lenders is very strong.
It’s still a good market for borrowers.