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Liftoff Delayed – Federal Reserve Holds Rates Steady

The Federal Reserve kept the fed funds interest rate unchanged at its September policy meeting citing increasing economic uncertainty abroad and continued low inflation at home as key risks to its outlook for growth in the U.S.

In its statement, the Federal Reserve said, “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

Chief among its concerns was global economic weakness, particularly in China and other emerging markets. Economic fundamentals in the U.S. are solid with the economy showing steady job gains and healthy household spending. However, given uncertainties in how global activity could affect spending and inflation in the U.S., officials appeared concerned about tightening monetary policy prematurely and having to cut rates back to zero in the near future.

That being said, most Federal Reserve officials still expect interest rates to rise in 2015. Thirteen of the 17 members of the committee predicted that the Federal Reserve would raise rates by at least 0.25 percentage point this year. Six committee members predicted an even larger increase.

Once rates do liftoff, it is expected that the pace of any future increases will be slow and cautious. Based on policy makers’ median forecast, officials said that they do not expect inflation to reach the stated two percent goal until 2018. If these forecasts hold, we can reasonably expect a continued low interest rate environment for some time.

Reduced Inflation Expectations


Reviewing Funding Plans
In light of the Federal Reserve’s recent announcement on interest rates and ongoing instability in the global economy, financial institutions will continue to struggle with market uncertainty and net interest margin pressures.

It is important to continue reviewing funding and balance sheet management plans to ensure your institution is positioned well in today’s environment and for a future rate increase when it occurs. FHLBank Atlanta offers numerous advance structures – ranging from Fixed Rate Credit ladders to Forward Starting advances to Floating-to-Fixed advances – that can help financial institutions maximize margins and mitigate interest-rate risk. Contact your relationship manager at 1.800.536.9650 to discuss your funding plans and any adjustments that may be beneficial to your institution at this time.

Loan Pricing in the Low-Rate Environment
The extended low-rate environment has compressed net interest margins for most financial institutions. Those seeking lending opportunities in highly competitive markets face particular challenges to winning deals while earning sufficient margin. Be on the lookout for FHLBank Atlanta’s next “Strategies for Growth” newsletter where we’ll offer views on loan pricing in today’s challenging market.

Sources:
Craig Torres, “Yellen’s Decision to Delay Fed Liftoff Points to Global Risks,” Bloomberg, Sept. 17, 2015.

Binyamin Appelbaum, “Fed Leaves Interest Rates Unchanged,” New York Times, Sept. 17, 2015.

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.

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