Recent Fed rate increase to have mild area impact

The Federal Open Market Committee raised the federal funds rate target by 25 basis points or 0.25% on June 15, and James Bullard, president and CEO of the Federal Reserve Bank of St. Louis, believes the Fed should take a “wait-and-see” approach before making any more adjustments to the rate.

Bullard on June 23 explained his position, noting that the U.S. economy is in a “low-growth, low-inflation, low-interest-rate regime.”

The FOMC has four more meetings this year in which they could adjust the rate, which is set at 1% to 1.25%. “At the conclusion of the last meeting, the published projections of committee members indicated a median expectation that the federal funds rate would be 1.4% by the end of 2017,” said Michael Pakko, chief economist and state economic forecaster for Arkansas Economic Development Institute at the University of Arkansas at Little Rock.

Long-term, the rate is projected to be between 2.8% and 3%, “but that is not expected until the end of 2019 or even beyond,” Pakko said.

Meanwhile, the most recent rate rise isn’t expected to have a “significant local effect,” but the rate increases put “upward pressure on consumer interest rates, particularly mortgage rates,” he said.

Tim Yeager, financial professor with the Sam M. Walton College of Business at the University of Arkansas and banking chair for the Arkansas Bankers Association, expects “slightly higher interest rate charges on credit card purchases and slightly higher income on short-term CDs, but the effect overall will be very small.”

The larger concern is the impact on long-term interest rates as the Fed continues to increase the federal funds rate and reduce its portfolio holdings, Yeager said. So far, the small increases have led to a mild impact on the economy. “But if the markets eventually believe the Fed is serious about taking liquidity out of the economy, long-term rates may jump quickly.”