Recently we had a member ask: *"If you can afford to build a building, then why can’t you afford to pay a higher rate on my certificate?" *
It’s a reasonable question. However, the cost of a building is not directly relative to dividend rates, but relative to current market conditions. We are in a business similar to others…we buy money and resell it. In the case of a grocer, he would never buy tomatoes at $1.75 a pound and sell them for less. This obviously is not a sustainable model.
The same is true with the credit union. We buy money by paying a dividend rate that will entice our members to deposit with us. Rates are determined by current market conditions. In many cases our rates are higher than our local competitors. In fact dividend rates on Payback Savings are near double the local rates on a 1-year certificate of deposit. If current market conditions included paying 5% on certificates, we’d pay 5% and we would not have to forego constructing a building to do it.
Loan rates also are at historical lows. Banks earn money to pay dividends by charging interest on loans and investments. When rates increase, you can expect loan rates will increase and enable banks and credit unions to pay higher rates on deposits.
So when will interest rates go up? Economic trends in the first half of 2014 have led some to believe the Fed might begin raising short-term rates by mid-2015. However, in September, the Federal Open Market Committee (FOMC) reported:
“Even with some very positive economic data this year, inflation remains very low and the labor market statistics reveal anemic jobs growth. We have no plans to raise rates for a considerable time. Raising rates too soon could cause the economic recovery to stumble again.”
We can assume “a considerable time” means no sooner than the latter half of next year.
So what is the concern of Fed Chairman Janet Yellen and the FOMC?
Here is my understanding:
The economy is driven by spending, which creates demand for producing goods and services. Production provides jobs, and jobs provide salaries for spending.
• Inflation is running below 2%. If the FOMC raises rates, the cost of operations for the businesses that produces the goods goes up and they have to (1) increase prices, which increases inflation, or (2) cut employees or salaries, or (3) both.
The Fed’s challenge is to find the right balance, and their biggest concern now is employment and underemployment, which means people are working at lower wages or working part time instead of full time.
If you are waiting on higher interest rates, watch for good news on employment and wages. These are sure signs the Fed will begin a move to higher rates, and they could move up quickly. As for now, the economy is just too fragile to consider increasing interest rates.
We have several options to help.
1. Payback Savings: This account pays a dividend rate more than twice the current rate on a one-year certificate. Your money is always available and if interest rates move higher than the Payback Rate, we’ll increase the rate on these accounts.
2. Bump-your-Rate Certificate: This 3-year certificate pays much higher than the 12-month certificate. If interest rates go up, you can request the higher rate twice during the 3-year term.
3. Consider Family Trust Investment Services: Historically the stock and bond markets always outperform traditional insured savings accounts at banks and credit unions. Making the best investment choice is relevant to the individual, their plans, and their tolerance for risk. For reliable guidance with your investments, contact Matt Griffin at (803) 367-4158.
As always, we value your opinions and feedback.