September 18, 2018

Lenders Should Expect Interest Rates to Continue to Climb

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While the Fed passed on raising interest rates in August, it is likely to increase them several more times this year. Lenders should anticipate these rising rates and can take steps to optimize portfolios.

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The Federal Reserve declined to raised interest rates in August, but that doesn't mean we won't see more rate increases on the horizon. Quite the contrary. The Fed indicated that it plans to increase interest rates two more times this year, following two previous rate hikes earlier in 2018. 

The agency made several statements about the economy and its policies. There also continues to be concerns about a flattening yield curve. Lenders who hold shorter-term assets may wish to discuss their options with a loan sale advisor. 

The Fed indicates that short-term interest rates will continue to climb. 

The Fed Leaves Interest Rates Unchanged in August

The FOMC elected to leave interest rates at their current level, which is a range of 1.75 to 2 percent. After the Fed's meeting in August, Chairman Jerome Powell touched on four points:

  • Inflation. While the economy's growth rate in Q2 was 4.1 percent, the year-end forecast is for a 3 percent overall growth rate, which is within the Fed's predicted range. There remain some fears about increased inflation.
  • Trade. The Fed has not seen any hard data to warrant action regarding the impact of potential trade wars on growth and investment. 
  • Rate Increases. The Fed expects to increase rates again in September and December but did not specify the degree of the increase. 
  • Politics. Powell emphasized that the Fed remains an independent agency that does not make its decisions based on political pressure.

The Impact of Interest Rates on Loan Portfolios

When interest rates rise, it affects consumer behavior and will have an impact on loan portfolios. Regarding the auto market, consumers are holding onto vehicles longer which is tightening the supply of available used cars. 

The Fed expects the value of the dollar to decrease in the second half of 2018. This not only creates a sense of urgency for consumers to buy now, but it will also impact loan portfolio values going forward.

As interest rates rise, it makes sense to partner with a whole loan broker to optimize loan portfolios.

What is Happening to the Yield Curve?

As short-term interest rates continue to rise while mid- and long-term bond rates remain stagnant, the yield curve continues to flatten. This has some analysts and economists concerned. 

At the end of August, the spread between the 10-year Treasury and the 2-year T-note reached 21 basis points, the lowest for a month-end since June 2007, when the spread reached 17 basis points. 

While there are various yield curve measures that are sending up signals, none have hit a reading that would signal a recession—yet. In fact, most of the major stock markets are continuing to perform at record levels, and there remains a positive spread between short-term money and lending. 

Use a Loan Sale Advisor to Shore Up Loan Portfolios

As interest rates continue to rise in the near future, lenders will need to take steps to optimize their loan portfolios. A whole loan broker can assist a lender in creating the best mix of asset classes for the current conditions. Holders of shorter-term consumer loans should consider selling now when prices are higher than they will be later in the year. 

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