It is appearing more imminent that the Federal Reserve will institute an interest rate hike at its mid-December 2016 meeting, exactly one year after it implemented its first interest rate increase in nearly a decade. The relatively weak economic recovery from The Great Recession (2007-09) was one of the primary causes for these developments, but now we have seen slow, but gradual improvements in the economy.
For the fourth consecutive month, job growth improved substantially, according to the latest Jobs Report released by the U.S. Dept. of Labor earlier this month. Total non-farm payroll employment improved by 156,000 last month as the unemployment rate remained at about 5 percent, which most economists consider to be full employment.
WASHINGTON, DC: Federal Reserve Board Chair Janet Yellen testifies during a hearing before the House Financial Services Committee September 28, 2016 on Capitol Hill in Washington, DC. The committee held a hearing on ‘Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System.’ (Photo by Alex Wong/Getty Images)
While the Fed’s decision to stand pat on its interest rates was unpopular at financial institutions, Federal Reserve Chair Janet Yellen, said in a news conference following the FOMC meeting that the decision “does not reflect lack of confidence in the economy.” Three members – Federal Reserve Bank of Kansas City President Esther George, Federal Reserve Bank of Cleveland President Loretta Mester, and Federal Reserve Bank of Boston President Eric Rosengren — of the 12-person panel voted to raise interest rates in mid-September.
Banks have been holding out hope for an interest rate increase, and once it does take place, will part with their money more freely once interest rates rise and lending becomes more profitable. When rates go higher, there is more of an incentive for financial institutions to grant loans. This often results in a boost of the economy. At the moment, many big banks are behind on the optimistic lending goals they set for themselves this year and want to close out 2016 strongly.
Loan approval rates at big banks ($10 billion+ in assets) improved for the seventh time in the last eight months in September 2016, according to the Biz2Credit Small Business Lending Index™, the monthly analysis of more than 1,000 small business loan applications on Biz2Credit.com. Big banks approved 23.4 percent of loan requests by small business owners, an all-time, post-recession high for the index. Pending an interest rate hike, there is room for improvement for this category of lenders next year, too.
Institutional lenders — credit funds, insurance companies, family funds, and other yield-hungry, non-bank financial institutions – have emerged as major players in the marketplace lending space and granted 63 percent of loan requests, also a new benchmark, last month. This category of lenders offers competitive terms on their loans and has a high rate of efficiency with low loan default rates that are a product of the advanced technology that is integrated throughout the approval process.
Meanwhile, alternative lenders, mainly providers of asset-based and cash advance loans have been on the decline over the last several years due to the emergence of institutional lenders and a recovering economy with low interest rates. In September 2016, they approved 59.7 percent of loan requests – down more than 10 percent from its high three years ago.
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What does this tell us? Business owners are no longer obligated to borrow at any cost and alternative lenders typically charge the highest interest rates. In addition, they are losing their competitive advantage as banks and other categories of lenders are implementing technology to expedite the loan process.
Loan approval rates at credit unions (41.3%) and small banks (48.7%) dropped last month, in part, because of their failure to digitize their small business loan application process.
The Fed’s release pf the minutes of its September 20-21 FOMC meeting should provide some clues regarding if, when and how much the Federal Reserve might increase the interest rates again. Early indications are that this it will happen in December at the central bank’s final meeting in 2016, so long as the economy remains steady. Rising inflation and job market strength are two of the biggest factors in their decision. If the Fed does institute an increase, expect that to be a positive sign for lending and small business growth in 2017.
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