PLANO, Texas — For the first time in two years, the U.S. Federal Reserve Board put the brakes on raising interest rates, concerned whether a slowing economy will keep inflation in check.

At its August meeting, the Fed voted to hold the federal funds rate at 5.25%. There is speculation in both directions on whether the Fed will raise rates one more time when it meets again Sept. 20. Industry watchers say that the slowdown of the housing market coupled with consumers and businesses reining in spending will continue to be key areas to monitor in determining whether rates will go up again.

"This pause could act like a pressure cooker," said Brian Turner, manager of advisory services at Southwest Corporate Federal Credit Union. "The fact that [the Fed] held rates may add to upward pressure on inflation. They're continuing to balance economic growth and stimulus against the inflation element."

Credit unions, meanwhile, have some options to consider during this pause and for the long term, Turner said. If credit unions are under the impression that this rate hike halt will be around for the duration, term rates may not move much for them. This may put less "upward pressure" on the Cost of Funds Index, which is made up of interest expenses of several deposits including checking, savings, money market, and certificates of deposit. Turner said COFI has gone up 10 basis points "at the most" since June 2004. "There's a lot of breadth between market rates and what the cost of funds are," Turner said. "Most of it is tied to the tighter liquidity that credit unions have seen because of loan growth last year." Credit unions might anticipate that overnight rates are going to have an impact on term rates, which could create more volatility, Turner said. The caution is if the Fed starts dropping rates, it might entice members to look for other term situations, he added.

What members, like many investors, may do is closely tied to what they can afford. When the Fed raises rates, many investors fear those higher rates could hamper economic growth. By stepping on the brakes and raising rates, the Fed has helped create a climate that will actually help sustain the recovery by keeping inflation low, some argue. While economic growth has cooled, it has not stopped and inflation has remained relatively modest despite rising oil prices. "I think the next move for the Fed will be up," Turner said. "Chances are if rates go down, I don't see a lot of depth on the downside. There's still a lot of room for rates to drop significantly, so there's some room for bounce." Meanwhile, over the last year, credit unions have aggressively priced their CDs, said Jeff Taylor, NAFCU senior staff economist. "It's been intentional. They say they're not going to chase hot money," Taylor said. "What they might face is some of their money market accounts and other money will go to higher-priced CDs." Taylor said "that could become a problem" because credit unions have to be able to loan most of it out. "You want to pay your members but at the same time, you don't want to be sitting on idle assets," Taylor said. Taylor is of the ilk that believes the Fed will continue to raise interest rates mainly because the economy may not be slowing enough and inflation continues to climb. There's still some room for short rates to go up, but once the bond rates go up, some of the longer-term rates will go up as well, he said. It really will depend on what the credit union is trying to accomplish on whether they will make any rate adjustments.

"Credit unions are starting to be more aggressive again with other share certificates," Taylor pointed out. "A lot of them went out and borrowed more. In an environment where we see loan growth slowing, they're going to ask themselves do they need the funds."

Nowhere has this aggression been more prominent in the industry than with three-month CDs and five-year CDs, Taylor said. On the other hand, MMAs "haven't really moved much." Banks continue to crank up rates on checking accounts. Keeping up with banks may not be the best route, but stiff competition, as it often does, could influence what credit unions might do if rates drop or stall.

"Every time rates move, banks will move," Taylor said. "Share money is leaving credit unions. This is one area where they need to consider if they can afford to lose. CDs are the best way to fund things but it is more expensive." –[email protected]

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