Interest rates likely will rise again in 2019.
How much and how often remains the question following the latest quarter-point increase in the federal funds rate last week by the Federal Open Market Committee (FOMC), which for two years has been raising interest rates from historic lows reached a decade ago during the Great Recession.
Citing “realized and expected labor market conditions and inflation,” the Fed raised interest rates for the fourth time in 2018 and signaled the potential for further increases in 2019.
“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook,” the FOMC said in its statement Dec. 19 after two days of meetings.
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.”
The Federal Reserve governors offered a median expectation for Real GDP growth of 3 percent for 2018, followed by slower growth of 2.3 percent for 2019, 2 percent in 2020 and 1.8 percent in 2021.
The FOMC’s move had been widely expected. While many economists still see further quarter-point increases in 2019, perhaps two or three during the year, they anticipated that the FOMC would tie any further increase to their effects on economic performance.
The Fed is now at the point of wanting to pause somewhat to see the results of two years of a rising rate environment, said Jeff Korzenik, chief investment strategist at Fifth Third Bank.
“They want to make sure they don’t essentially drive the economy off a cliff and inflation pressures are under control,” Korzenik said.
Economists offering outlooks for 2019 see higher interest rates as a potential drag on U.S. economic growth that adds to the pressure of the tight labor market and higher labor costs. Despite remaining comparatively low historically, higher rates also could contribute to an easing of auto and home sales.
“Borrowing continues to be fairly good for business and for consumers, although certainly the price of vehicles have gone up and the price of houses have gone up based on these interest rates,” Jim Robey, director of regional economic planning services at the Kalamazoo-based W.E. Upjohn Institute for Employment Research, said during an economic outlook this month in Grand Rapids.
Higher interest rates will make it a little more costly to borrow or access capital, pinching margins or even affecting some business expansion plans, said Steve Conley, managing director at the Grand Rapids office for turnaround firm Conway MacKenzie Inc.
Businesses already should have been planning ahead for rising interest rates, Conley said.
“It’ll be intriguing to see how they perform through that environment,” he said. “There’s definitely going to be some stress on these businesses that have been working really hard to bring in new business and grow their businesses while they had the opportunity. That’s required initial capital and initial financing. Have they prepared for the rising rates? That’s to be seen on how that will ultimately impact their business.”
Higher rates could steer more companies next year to take a look at alternative or non-bank financing to support capital equipment purchases or expansion, or pursue equipment leases rather than purchases, Conley said.
Despite the steady rise in rates since late 2016, Conley does not hear a lot of worry from clients. The tight labor market that limits their growth has been a greater topic of conversation than higher interest rates, he said.
“I sense that most people aren’t real concerned about it yet because it really hasn’t had a significant impact, but I’m concerned that people underestimate here in the medium term how impactful it’s going to be to their business and their ability to grow and maintain margins,” Conley said.
Likewise, Hudsonville-based West Michigan Community Bank “has not heard a significant amount of chatter,” President and CEO Phil Koning told MiBiz. He expects from zero to two rate increases in 2019, “depending on how the economy plays out.”
The higher rates will create more pressure on banks in 2019 as depositors expect a higher return on their money, Koning said.
“They’re not willing to take 0.1 anymore. They want to earn bit more on their deposits,” Koning said.
Koning and other bankers who offered their views to MiBiz on what’s ahead in 2019 say that even with the latest increase by the FOMC and those of the last few months, interest rates remain relatively low.
“Rates are higher than where they were, but historically they’re still very attractive,” said Don VanDine, regional vice president for middle market banking at Wells Fargo Bank in Grand Rapids.
VanDine doubts that higher interest rates will have much of an impact on areas such as the M&A market in 2019.
“Right now, the people that are coming in are very liquid and financing may not be at the top of their concerns list. They’re looking for good fits and strategic fits and they’re looking to take big swings at it,” he said, noting quarter-point or half-point raises will not “move the needle much” for customers. “If the difference in financing a deal is the difference between four percent or five percent on your financing and it crashes your deal, it’s probably on pretty unstable footing to begin with.”