Interest Rates and a Healthy Economy
Interest Rate Increases Likely to Continue
In the wake of multiple hikes in the last two years, the Federal Reserve has indicated that several more interest rate increases are likely to occur this year. According to Chuck Garcia, Director of Commercial Deposits and Treasury Management at Associated Bank, this is a healthy diagnostic of the state of the economy.
“I think overall, it’s a positive,” Garcia said. “I think the artificial lows that we sat at for so long had a dampening effect on so much of certain elements of the economy.”
Garcia notes that all signs point to further increases in June, September and possibly December.
“What happens, who knows, but I think the likelihood of at least one more after June is highly likely,” Garcia said. “I think people are seeing in the marketplace today a lot of movement of people’s deposits (and) people shopping rates.”
Client Dialogue is Critical
“If you pick up the paper, you see it—be it consumer or corporate type of rates—are absolutely on the rise,” Garcia said. “And so to be able to retain your good customers, you have to be aggressive and try to match the marketplace. If you’re a net investor, it’s a very good thing for you, because now your money’s actually worth something.”
Garcia notes he doesn’t expect increases to continue indefinitely.
“I would have to say as we hit the mid level next year, I would have to think we probably would be at a more historic normal level,” Garcia said. “Given the circumstances as they are today, if they don’t change dramatically, I think they’ll probably level out about that time.”
Rate increases have motivated banks to become as competitive as possible in the marketplace.
“There’s absolutely a bigger focus, I’d say, in our bank—and I’d say the same thing is happening with our competitor—that we have to take care of our great clients and make sure we’re in front of that with them,” Garcia said. “So it’s a very heightened focus I would say for all of us.”
Open, helpful and meaningful dialogue with clients is key.
“I think trying to be—not aggressive—but be proactive and say, (letting them know) ‘hey, we anticipate in June a rate increase coming up.’ And these are obviously for bigger depositors—be they consumers or corporates—be proactive with them and say, ‘Here’s what we’re anticipating. Why don’t we look at this now in anticipation of that?’ The idea there is you try to get in front of it with your client versus the other guy knocking on the door.”
Consumers will feel the effects of rate increases in varying ways, he notes, depending on whether they’re examining their loans or their deposits.
“Back to the rates side, people that are willing that have blocks of money and willing to lock in on a CD basis—I wouldn’t go too long (in) my opinion, for what that’s worth—but people that are willing to go out for a little bit longer than they would have historically and just let it sit in a money market, there’s a good return these days. It actually is material—whereas again two-three years ago, it didn’t matter.”
“I think the downside for the consumer, is, as rates rise, if you’re a borrower you know your home equity, your car loan, etc., those are going to rise with it,” Garcia said. “So people that are looking to borrow on a consumer or … corporate basis, that money is getting more expensive, too.”
Another Recession Unlikely
“I think companies in the big recession pared themselves down and got lean and mean, and so they’re seeing the benefit of that today,” Garcia said. “I think the one thing that is a question mark—and maybe it is really around the rate—that is the consumer. The consumer has seemed to slow down their overall spending and borrowing a little bit more … If gas gets really expensive, that affects the consumer and their willingness and ability to travel, etc. So I think the consumer is a little bit of a question mark in my mind.”
Though the recession that began about a decade ago continues to influence the decisions of consumers and corporations alike, Garcia believes we’re a safe enough distance away from that economic low, and are in better shape as a result of it.
Barring unforeseen dramatic geopolitical developments, Garcia sees the economy continuing to keep developing at its current pace. One trend to keep an eye on is the price of oil. “Oil is pretty high right now,” Garcia said. “It’s higher than people expected.” However, he doesn’t anticipate much in the way of ripples from this. Overall, Garcia sees little potential for another recession.
“As a banker, you’re always worried about it and you always think about it, but just you look at the fundamentals of companies, the hiring, the employment level is so full right now. I just don’t see that as something that—near term anyway—should be in the cards.”