What would an interest rate hike mean for Central Mass. banks?
Tony Bisceglio of Clark University expects the central bank to raise rates within a year.
If there's anyone in Central Massachusetts who can speak with authority about interest rates, federal policy and banking, it's Clark University visiting professor Tony Bisceglio, an economist with more than 25 years of experience in the banking industry. But ask Bisceglio about when the Federal Reserve will make a move to raise interest rates and he hesitates.
“I've been saying they're going to go up for I don't want to say how long,” he said. “If you asked me when, I'd say certainly within the next 12 months. ... I could be wrong. I certainly have (been) before.”
Bisceglio is far from alone in that. Since the start of the financial crisis in 2008, the government has been holding interest rates close to their lowest possible level in the hope of stimulating more economic growth and job creation. Critics have argued that the policy could put too much money into the economy, creating excessive inflation, but so far there's no sign those fears are coming true. Still, with the unemployment rate gradually edging downward, Fed Chair Janet Yellen has begun hinting that rates could start rising sometime next year.
For the area's banks, the possibility of higher interest rates is a welcome notion, according to Brian Thompson, CEO of Worcester-based Commerce Bank. Since Fed policy affects most interest rates, directly or indirectly, a higher interest rate would mean banks collect more interest revenue on loans while they pay more to depositors. But Thompson said banks don't pass on all of a rate increase to savers, instead increasing the rates they pay by 75 to 80 percent of the total hike.
“The bank makes a little on that differential,” he said. “I think, generally, most banks will benefit with higher rates.”
David Floreen, senior vice president of the Massachusetts Bankers Association, agreed.
“When you have such a low-rate environment, there's very little room for error and there's very little margin for flexibility,” he said. “If you had much higher interest rates ... you've got a little bit more room to play with.”
On the other hand, local banking experts said “much higher” interest rates are certainly not in the offing any time soon.
Need cash? You may not want to wait
“We think that whatever they do, whatever happens, it'll be in a very controlled and calculated way,” Thompson said.
For area businesses, one of the big questions about a potential federal policy shift is what it will mean for commercial loans. Bisceglio said it would be a smart move for anyone who needs a cash infusion to look for it now.
“If you're thinking about borrowing money, whether you're a business or a consumer, don't wait,” he said. “I would do it right away.”
William Lasher, a professor of finance and business law at Nichols College in Dudley, said businesses that have reason to spend are probably already taking that advice. And if rates rise, he said, they'll most likely slow their borrowing to match.
“Typically, businesses borrow to do various projects, and, the more the money costs, the more you need to make from the project,” he said.
On the flip side, William O'Brien, business administration and economics professor at Worcester State University, said higher rates would also change banks' incentives, perhaps giving them a reason to loosen lending standards.
With rates as low as they are now, he said, “banks can only charge 2, 3, 4 percent interest. There's not much incentive.” If they rise, he added, “I think the banks may be more willing to make loans because they'll see greater returns.”
But will higher rates mean fewer loans?
Thompson said higher rates wouldn't make Commerce more eager to lend money. But he also said he doesn't see higher rates deterring potential borrowers very much.
“I've always been under the feeling that people borrow because they need to borrow to support their business operations, and they pay back loans when their business is strong,” he said.
Thompson said big corporations like General Motors may make calculated decisions to take advantage of changing rates, but for local family businesses, it's not typically a big consideration.
“I think people borrow to support their business needs, as long as it's not outrageous rates,” he said.
And that brings up another aspect of any increase in interest rates that could be more important than its direct effects. If the Fed raises interest rates, it will be because the foremost experts on the U.S. economy see things heating up enough that inflation and asset bubbles are a bigger threat than unemployment. When that happens, it will reflect both new business activity and a signal to businesses that it's a good time to grow.
“This is all circular,” O'Brien said. “The demand goes up, that drives the spending up, that drives the income up ... the problem is if you get too much, you eventually end up with inflation.”
That means that, if the Fed moves to keep inflation down, businesses may see it as a good time to invest, even if it means their interest rates will be a bit higher than they've been for the past six years.
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