Now that the Federal Reserve Board has begun raising its key short-term interest rate in a long-awaited move, banks in southeastern Wisconsin are seeing more customers shifting their investments to certificates of deposits (CDs) and money market investment vehicles.
Federal Reserve Chairman Alan Greenspan and The Federal Open Market Committee increased the federal funds rate from 1.00 percent to 1.25 percent on June 30, in an attempt to cool the economy’s growth and reduce inflation.
Higher interest rates are encouraging more people to save money, but interest rates for certificates of deposit had already been rising prior to the interest rate hike by the Fed.
More customers are putting their money in CDs as rates have climbed to between 3 and 4 percent, said Robert Eastman, chief executive officer and chairman of Waukesha-based Sunset Bank.
"You never saw that the last three years," he said. "CD rates have risen dramatically in the last six weeks in anticipation of (interest) rates going up. It will probably level off now, because they have been way ahead of the curve."
"Relative to CD rates, the deposit rates have already been inching up," said Nicholas E. Nett, chief operating officer for Sheboygan-based Community Bank & Trust.
Some bank customers kept their money in savings accounts or money market accounts in recent years, waiting for interest rates to go back up before putting their money into CDs, said Ty Taylor, president of Waukesha State Bank.
"People with CDs will be delighted that rates are going up," Taylor said.
The interest rate hike by the Fed means lending rates tied to the prime rate, such as those for variable rate commercial loans and home equity loans, will also increase by a quarter of one percent. But area bank executives said they still expect consumers to take out loans, despite the rate increase.
"At these levels, rates are at 45-year lows," Nett said. "A quarter of a percent (rate increase) isn’t going to have a significant impact."
"Rates are still very low," said Becky Arndt, first vice president of Cedarburg-based Ozaukee Bank. "It’s not going to have a great impact on the rates and the payments of our clients. It will, of course, affect our prime-based loans, but in general, it’s going to have very little affect as the rates are still very competitive and very low."
Consumer borrowing habits won’t change unless the Fed makes several additional interest rate increases, bank executives said. If that happens, it could discourage some businesses from taking out loans for building expansions or major equipment purchases, said Mike Mahoney, chairman and president of Milwaukee-based Park Bank.
However, steep rates should not be a problem for the foreseeable future, Eastman said.
"The rates are just way too low," he said. "The economy is doing very well. All of my manufacturing clients are bursting at the seams. That was not the case a year ago. Inflation is starting to set in, and it will increase if rates are not increased."
Bankers are waiting to see if the Fed will raise interest rates again before the November presidential election.
"With underlying inflation still expected to be relatively low, the (Federal Open Market) Committee believes that policy accommodation can be removed at a pace that is likely to be measured," the Federal Open Market Committee said in a statement. "Nonetheless the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability."
Some area bank executives say the recent rate increase will have little affect on their businesses.
"Banks do a little better when rates are falling, but rates go up and down," Taylor said. "In the overall scheme of things, it’s not a big deal."
"As long as rate increases are gradual, it should not have a great impact on the bank," said Stephen J. Steiner, senior vice president of retail banking for Brookfield-based North Shore Bank. "Some banks do better when rates are going down, and others do better when rates are going up. We’re fairly neutral."
"(An interest rate increase) affects every bank differently," Mahoney said. "Depending on their asset and deposit mix. It will have a short-term positive affect on (Park Bank), just because of the margin."
"Our objective will be to obtain as much balance as possible between our assets and our liabilities," said Don Wilson, senior vice president and corporate treasurer for Milwaukee-based Marshall & Ilsley Bank. "On each side of the balance sheet, we want to be as equal as possible."
