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What Wednesday’s Liftoff Means for Your FHLBank Atlanta Funding Strategy

Dec. 21, 2015. Bringing to an end nearly a decade of near-zero interest rates, the Federal Reserve on Wednesday announced a 25 basis point increase in the federal funds target interest rate.

The Federal Open Market Committee (FOMC) voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, an increase from zero to 0.25 percent. Separately, FOMC participants forecasted an appropriate rate of 1.375 percent at the end of 2016, implying a four quarter-point increase in the target federal funds range next year.

In its statement released on Wednesday, the FOMC said, “The committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.”

The committee also stated that it expects economic conditions will evolve in a way that “will warrant only gradual increases in the federal funds rate,” which aligns with its previous projections. 

The Rate Rise and Your FHLBank Atlanta Funding Strategy

Most economists and the market expected Wednesday’s rate increase, but does it mean that the economy has turned the corner? The FOMC participants signaled that they believe economic indicators for employment and inflation are tracking toward target levels. At the same time, the Federal Reserve released updated economic forecasts showing that senior officials believe the economy will grow slowly in the coming years, predicting, on average, an expansion of 2.4 percent in 2016 and an unemployment rate of 4.7 percent. Officials predict slower growth in subsequent years and a gradual rise in inflation to 2 percent.

The interest-rate environment also remains uncertain, including whether this rate increase signals that the yield curve will shift and lead to higher funding rates in the near future. As financial institution executives evaluate balance sheet positions, their funding strategies will hinge on whether they believe that Wednesday’s move by the Federal Reserve is the beginning of a turn or a false start.  

FHLBank Atlanta offers funding solutions to support balance sheet management strategies in any interest-rate scenario and for any rate view. A financial executive’s view on borrowing rates will guide their balance sheet management strategy and help determine what type of advance best supports that strategy.

If the view is for higher rates, locking in term funding now may be the best option. FHLBank Atlanta’s long-term Fixed Rate Credit advance is a simple, yet potentially effective tool to manage interest-rate risk. The Bank’s customized structured advances can also help extend the liability profile and mitigate interest-rate risk. For example, a Forward Starting advance allows borrowers to lock in an interest rate now for future funding without immediately taking on additional liquidity. It’s an excellent option to fund future loan growth or mitigate anticipated deposit run-off. Conversely, if the view is for rates to hold steady for now, FHLBank Atlanta has short-term funding solutions to help manage liquidity until the market moves.

For additional information and to discuss funding plans in light of the Federal Reserve’s recent move, contact your FHLBank Atlanta relationship manager at 1.800.536.9650.

The Federal Home Loan Bank of Atlanta is not a registered investment advisor. Nothing herein is an offer to sell or a solicitation of an offer to buy any securities or derivative products. You should consult your own legal, financial, and accounting advisors before entering into any transaction.

Sources:

Condon, Christopher, “Fed Ends Zero-Rate Era; Signals 4 Quarter-Point Increases in 2016,” Bloomberg, Dec. 16, 2015.
Applebaum, Binyamin. “Fed Raises Key Interest Rate for First Time in Almost a Decade,” New York Times, Dec. 16, 2015.

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