After issuing a steady string of interest rate increases over the last three years, the Federal Reserve could start lowering rates again in the coming months in a move to keep the economy growing, making borrowing a little cheaper for businesses.
Members of the Federal Open Market Committee decided in June to maintain the federal funds rate at its present level but indicated rate reductions could come in the months ahead.
“The Fed is very sensitive to the continued support of the economy in general,” said Phil Koning, president and CEO of Hudsonville-based West Michigan Community Bank. “They’re acting pretty quickly if they’re already talking about lowering rates. We have a very accommodating Fed.”
Long-term rates had already been going down in anticipation of the Fed decision, Koning said. He expects the prime rate to drop from 5.5 percent to 5 percent this year, a level that’s “more appropriate for where the economy is.”
As well, Koning expects a cut of 50 basis points in the federal funds rate.
The FOMC continues to see economic growth, strong labor markets, and inflation below 2 percent, although “uncertainties about this outlook have increased,” committee members said in a statement following their June 19 meeting.
In a June 25 address to the Council on Foreign Relations in New York City, Federal Reserve Chairman Jerome Powell said the FOMC will “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”
“The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” Powell said. “Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened. But we are also mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook.
“We will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
In an economic outlook accompanying the FOMC’s June 19 statement, the Federal Reserve Board predicts Real GDP growth of 2.1 percent this year, followed by 2 percent in 2020 and 1.8 percent in 2021.
Rick Dyer, president and CEO of St. Joseph-based Edgewater Bank, expects the FOMC to begin reducing interest rates as early as its meeting later this month.
Soon after the June 19 meeting, Dyer received a couple of calls from commercial clients asking “if this is still the right rate” for their loans. He and other bankers doubt the kind of rate reductions that could occur in the coming months will affect commercial lending activity.
“I don’t anticipate it being enough of a conversation to sway anyone one way or another,” Dyer said. “They’re paying attention, but I don’t know that it’s going to convince anyone in either direction to either wait or not do a project, or to do a project for a quarter or half percent. It either makes sense to do or it doesn’t make sense to do.”
Rates still favorable
Even with the increases the FOMC implemented since late 2015, including four rate hikes in 2018 alone, bankers say interest rates remain comparatively low. The rate increases came off of historic low levels that were put in place a decade ago during the deep economic downturn.
“We’re still loaning money at a very, very favorable rate. A couple cuts here or there, while it may be beneficial, is not going to change the way most of our clients are running their businesses,” said Mike Chaffin, senior commercial lender for Fifth Third Bank. “I don’t know that it will really drive a lot of activity as far as additional borrowings. I don’t see a rate cut as a reason for them to go out and borrow.”
Like Dyer, Chaffin gets inquiries about the timing of interest rate reductions.
“What the clients are basically wanting to know is do you think it’s going to happen and if so, when,” he said.
Koning thinks lower rates may nudge some businesses to proceed with an expansion if they were unsure about whether to act, although “they have to have business first to support it.”
Interest rates “are an important component of the overall confidence equation,” and future reductions after a period of increases potentially could spur economic activity, said Mike Hollander, Michigan market leader for Commerce Bank, a middle-market lender.
“That helps a bit knowing we’re not on a continued path toward increased rates. That cost of capital is a big equation for our clients who borrow money,” Hollander said.
However, the promise of lower interest rates in the months ahead and the potential economic benefit “may be outweighed a bit by some of the headlines in the news” about trade tensions and tariffs, plus “cloudy” outlooks for the economy, Hollander said.
“Some of those headline risks need to dissipate a bit before the full benefit of a more moderate or lower interest rate environment really frees up additional investment capital,” he said.