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Written by Cyndie Martini
on October 27, 2016

The final few months of 2016 are sure to be filled with many big developments for our country. While the obvious one is the upcoming presidential election, there are plenty of other chances for change on the horizon. The Federal Reserve will meet two more times before the year's end to discuss whether the economy is capable of absorbing an increase in the federal funds rate.

The effects of the Great Recession took a toll on the nation's economy, so the Fed lowered the rate to a range of between 0 and 0.25 percent. But after years of recovery, Fed Chair Janet Yellen announced the Fed's vote to increase the federal funds rate for the first time in nearly a decade. As of December 2015, the rate is between 0.25 and 0.5 percent. There were also plans to make additional rate hikes throughout 2016. 

However, the year started bleaker than many economists predicted. A slow job market at home and unforeseen changes overseas worried investors, and the Fed shied away from increasing rates until the landscape improved. As the end of the year draws near, and no interest hike yet announced, industry experts are on the edge of their seats, waiting to see what the Fed will do next.

Consumer expectations

Changes in the federal funds rate affect many aspects of the economy in varying ways. Credit Union Journal pointed out that a hike could change consumers' expectations for their financial institutions. If the federal funds rate is higher, they will likely want to see that reflected in their yield-producing accounts.

"Customers and borrowers are all seeking higher yield, even if it's only a marginal increase," Perc Pineda, senior economist at CUNA, told CU Journal after the increase last December. "As such, banks and credit unions will be competing with each other to provide that higher yield."

To stay competitive, credit unions may have to adjust their offerings following the rate hike. It's a good idea to have a plan in place for either outcome. Consumers will want to know how they are affected by any change as soon as they hear about it. Having that information on-hand will help set realistic expectations and show your members that you have their best interests in mind.

Improving conditions

Over the summer, the job market improved steadily and many people became more confident about the economy. In fact, last month's Consumer Confidence Index, a measure calculated by The Conference Board, a business research organization, found that Americans have a pretty good outlook on the nation's economy. The index reached 128.5, the highest rate since the recession, according to Lynn Franco, The Conference Board's director of economic indicators.

These indicators are certainly good signs that the economy is healthy enough for another rate increase. While the last two meetings resulted in no change, there were members who were in favor of a hike. Esther L. George, Loretta J. Mester, and Eric Rosengren, presidents of the Federal Reserve Banks of Kansas City, Cleveland and Boston, respectively, pointed to improvements in employment and inflation as reasons to increase the rate by 25 basis points.

The next meeting will take place on November 1-2, just days before the presidential election. With much of the country's attention turned to the race, it's unlikely this meeting will produce different results. However, many economists are predicting a rate hike during the December 13-14 meeting, according to The Wall Street Journal. Some believe that Yellen will get backlash if the Fed decides to keep the rate at 0.25-0.5 percent again.

However, just because many people think a rate is bound to happen doesn't mean it will. Having a plan for your credit union for either outcome is crucial because the fact is that no one knows for sure what the next few meetings will result in.


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