Trending Down: Banks, credit unions see lower interest rates ahead

Bankers and credit union executives take a variety of things into consideration when deciding how much interest to pay depositors for holding their money and how much to charge for loans.

Among them are the current need for deposits to fund loans. Inflation forecasts and what competitors are doing also play into setting rates. “Setting rates is not an exact science,” said Mike Worden, president and CEO of Honor Bank.

A wild card has been thrown into the interest-rate-setting equation: the president of the United States. Since the Federal Reserve boosted interest rates last year, President Donald Trump has relentlessly taunted the Fed on Twitter, calling Fed members “boneheads” and demanding that they lower rates.

The Fed did just that on Sept. 18, dropping its benchmark interest rate 25 basis points, or a quarter percentage point. It’s the second time in two months the Fed has lowered interest rates. Fed officials have cited trade tensions, slowing global growth and little inflation in lowering rates this year after the Fed boosted rates four times last year.

David Shooltz, local market president of Fifth Third Bank in Traverse City, said his bank’s forecasters expect the Fed’s benchmark rate to fall 68 basis points, or nearly 0.7% by September 2020.

Local bankers say they’re confident in the Fed’s independence in setting rates. But they express some worry that the Fed, under pressure from Trump, could go too far in cutting them.

Trump recently called for the Fed to lower rates below zero, a tactic countries sometime use to jump-start sluggish economies. Most economists say the U.S. economy, while slowing, is still robust. Negative interest rates benefit borrowers, but hurt savers and could squeeze profits of financial institutions. “If rates go below zero, we would have to charge people to take their deposits,” said Andy Kempf, president of 4Front Credit Union in Traverse City. “Negative interest rates are a bad idea.”

Lowering rates to zero also poses risks because the Fed would have little room to stimulate the economy, should it fall into recession. “If rates drop to zero, what happens if we need to goose the economy?” Kempf said. “We have to be careful we don’t go down that slippery slope.”

Still, local bankers and credit union officials say they expect a lower interest rate environment over the next year or so. That is likely to cut borrowing costs for consumers and businesses, but hurt savers, who will be paid lower interest rates in deposit accounts. “The deposit environment is about to trend down a bit,” said Scot Zimmerman, Traverse City community president of Chemical Bank.

But savers can benefit from special promotional rates banks and credit unions occasionally offer to boost deposits. Zimmerman said Chemical Bank recently concluded a special rate of 1.65% on a money market product, slightly higher than what it normally pays. “We always look at the local market to see if we need to do something different than the competition,” he said.

Local bankers say Traverse City’s economy, which is accelerating at a healthy clip, requires them to compete for deposits to fund loan growth. “We’re as aggressive as we can be on deposits,” Shooltz said. “Everybody needs deposits right now.”

In setting loan rates, financial institutions consider a variety of factors, including cost of obtaining funds, Fed rates, borrower creditworthiness and what their competitors are doing.

Some banks offer lower interest rates on commercial loans if those borrowers give them all their banking business. That’s the case at Independent Bank in Traverse City. “A lot goes into it,” said Tom Ranville, Independent Bank’s senior vice president of commercial lending. “But a borrower who has lots of business with us will get a better rate. We want to be able to do everything for the customer.”

Worden said he looks at it what his competitors are doing and what his loan portfolio looks like at any given time in setting interest rates. He thinks there will be downward pressure on interest rates in coming months, but that could change in the current volatile economic and political environment. “Ask me today about interest rates and ask me in two months and it could be a different answer,” Worden said. “Things could change.”