Higher interest rates during 2017 haven’t acted as a damper on commercial lending in West Michigan, although some lenders are seeing borrowers moving to fixed-rate business loans.
Two interest rate increases — in January and June — have made borrowing a little more costly for businesses, although “that really has not changed anybody’s borrowing plans to any discernible degree that I’ve seen,” said Mercantile Bank President Ray Reitsma.
Dave Quade, Grand Rapids market president for Horizon Bank, notes that even with the two increases this year, interest rates in the U.S. remain historically low after the Federal Reserve drastically cut them years ago in the wake of the 2008 financial crisis.
“From a borrowing standpoint, they’re still very attractive,” Quade said.
In the wake of the increases, Quade and other commercial lenders say they are seeing more prospective borrowers now wanting a fixed-rate loan versus a floating rate loan. The view is that interest rates will likely continue to go up as long as the U.S. economy remains sound.
“That’s gotten more people to think that now is the time to lock in that rate,” Quade said. “And they’d like to fix that for as long as suitable.”
The Federal Open Market Committee twice this year voted to raise the federal funds rate, which now sits at 1 percent to 1.25 percent after the last increase in June. The Fed decided in July against a further increase in the federal funds rate, the rate at which depository institutions lend to one another overnight.
In a weekly economic briefing following the FOMC’s July 25 decision to hold interest rates at the present level for now, Comerica Inc. said it still expects another increase this year. Chief Economist Robert Dye anticipates that will come at the Fed’s last meeting of the year in December.
“For most of the rest of the year, it’s going to be — at least from what the Federal Reserve is going to do — a non-event,” Dye said.
What happens in 2018 is “a big question right now,” although Dye does believe the FOMC will implement up to two more interest rate increases.
“The Fed is considering lower than expected inflation, but economic theory says that we should expect more inflation, so there’s a little bit of tension between the actual data and what the theory tells us to expect,” he said. “My guess is we might get one or two more Fed rate hikes in 2018, but that might be it for this cycle.”
In a statement following its July meeting, the FOMC said it will hinge future decisions on increases in the federal funds rate on assessments of economic conditions amid aims to maximize U.S. employment and hold inflation to 2 percent.
“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” the FOMC said in a statement. “(T)he federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
The most recent U.S. economic outlook from Comerica, issued in early May, predicted a federal funds rate of 1.82 percent in the fourth quarter of 2017.
SEEKING FIXED RATES
Because of the potential for higher interest rates later this year and next, “very few people are choosing floating rates anymore” for their business loans, said Brad Henion, chief lending officer at Sparta-based ChoiceOne Bank.
ChoiceOne Bank is offering more swap agreements than it has in the past for commercial borrowers seeking new credit or for those who want to refinance a loan to get away from a floating rate. They’re also seeking longer terms for their loans, Henion said.
“They’re fixing a lot more,” he said. “And they want to extend those rates out.”
The move to more fixed-rate loans also stems from perceptions about future economic prospects for the U.S. In particular, some business owners worry the next downturn is not too far over the horizon, Henion said.
The change in the market has not affected all banks, according to local lenders. Reitsma at Mercantile Bank, which has a commercial loan portfolio that’s split evenly between fixed and floating rate loans, said the move to fixed-rate loans “just has not been a theme” at his institution.
While more prospective borrowers prefer a fixed rate, Henion also said he’s not seen the two interest rate increases in 2017 resulting in businesses shying away from borrowing. He believes that would take at least two more rate increases to be a factor.
“I’ve had nobody walk away from an interest rate discussion yet,” he said.