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home : news : business   May 24, 2016

8/4/2014 1:59:00 PM
Who stands to gain if Fed raises rates?

Tom Collins
NewsTribune Senior Reporter

It isn’t easy keeping up a cemetery — and weeds and falling tree limbs are often the least of your worries.

John Hurst is a member of the cemetery board for St. Vincent’s Cemetery. They, like most Catholic cemeteries, are in good fiscal shape.

But cemeteries are regulated and depend on simple interest-bearing vehicles to produce revenue; Hurst would be by no means unhappy if interest rates increased by at least a tick.

“Everything is in a money market of some kind or a CD,” Hurst said. “An increase in interest rates would definitely help.”

The Federal Reserve may finally do something about it.

Various news outlets report the Fed may finally raise interest rates in late 2015, citing economic data showing the sufficient improvement to lift rates above historic lows.

So is that good news or bad news for the Illinois Valley?

Cost of borrowing
“The short answer is that it’s anyone’s guess,” said John Duncan IV, comptroller for the city of La Salle. “One of the city’s primary concerns should the Fed decide to bump rates is the effect it will have on the cost of borrowing money either in the form of bonds or more traditional bank financing.

“Thanks in no small part to our strong relationships with local banks very willing to help us, the city has done a nice job of locking in some very aggressive rates over the last few years making the cost of city business much less expensive for taxpayers than it will be in the future.”

And if the Fed raises rates, he said, financing becomes more expensive, which in turn affects the number, scope, and cost of projects the city can take on. Higher rates could also impede businesses and venture capitalists from investing amid higher costs.

“I suspect the Fed will move slowly and prudently so as not to disturb the economic recovery much of the nation is seeing,” Duncan said. “Of course, like we lagged behind the 2008-09 decline locally, we are also lagging behind the recovery. Should banks be forced to react immediately to rising Fed rates, I worry that it will stall our local private sector recovery before it has even started. One thing we do have going for us is that commercial loan rates at our local banks tend to be lower than many larger markets. So that may lessen the impact of future rate increases and keep us moving forward on the path to economic recovery.”

Some will be happy
But a rate increase may also help entire blocs of taxpayers and area residents. The list includes:

Senior citizens:
Peru lawyer Jonathan Brandt, an experienced elder law attorney, said his clients have fled to annuities and tax-free bonds because the interest rate environment has so reduced the value of traditional savings accounts and certificates of deposit.

Brandt said it’s “incredibly important” for seniors have savings options that provide a solid return, noting a rule of thumb that a person’s age, subtracted from 100, represents the percentage of holdings that should be invested in secured assets.

“So if you’re 80, you need to have 80 percent of your money in fixed assets and 20 percent in variable assets,” Brandt explained, “because if they lose money on the variable assets, they don’t have as much time to recover.”

Borrowers: True, people taking out a mortgage will pay more if rates climb; but loans are hard to come by when rates are low.

Tom Guttilla, owner-broker of Coldwell Banker Today’s Realtors in Peru, said some market watchers think banks aren’t lending as much because interest rates are too low for the banks to turn a profit. Some theorize that a small increase in interest rates would lure more lenders back into the game and open up lines of credit that aren’t available now.

“If they raise rates gradually, I don’t think it will negatively affect the housing market,” he said.

Brandt agreed the key word is “gradually.”

For banks to turn a profit, they must strike a careful balance between interest-bearing loans and savings vehicles on which they pay interest.

Any abrupt surge in rates could require banks to pay out interest rates even as they collect interest on loans, such as mortgages, below 5 percent.

“It’s going to be tough for a while to get CD interest rates up,” he said, “because loans have been issued at 15- and 30-year terms at historically low rates.”

Tom Collins can be reached at (815) 220-6930 or Follow him on Twitter @NT_Court.

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