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What the Fed’s rate hike means for one community bank

The Belltown Branch of Sound Community Bank in Seattle, Washington.

The Belltown Branch of Sound Community Bank, which is headquartered in Seattle, Washington. Courtesy of Sound Community Bank

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As expected, the Federal Reserve raised its benchmark interest rate a half a percent this week in an effort to slow down inflation. Anticipation of the Fed’s rate hikes has already pushed mortgage rates higher, but the impact on other rates could take longer. 

“I think there’ll be a lag to see deposit rates go up,” said Laurie Stewart, president and CEO of Sound Community Bank, which is headquartered in Seattle, Washington. “That need to raise rates to keep making loans just isn’t there yet.” The following is an edited transcript of Stewart’s full conversation with “Marketplace” host Kai Ryssdal.

Kai Ryssdal: How, first of all, is business at Sound Community Bank these days? 

Laurie Stewart: Well, business is good. And one of the things that I think is really significant is of those 1,515 PPP loans we made, all but 13 of them are paid off and the vast majority were forgiven. Isn’t that awesome?

Ryssdal: That’s that’s actually really good, and not only just for what that means for small businesses, but that they could figure out the paperwork and all that stuff, right?

Stewart: Exactly. For all the bemoaning we did about the program and getting it up and running, it really sorted out very, very well. It makes me smile. 

Ryssdal: What is your sense of how small businesses are doing, up where you are?

Stewart: It’s a great question. I think it varies so much about what kind of business you’re in. Certainly, we’re seeing, it’s like — I have to park within the lines in our parking garage now, because there’s so many people back around. But I do think it varies. However, our sense in our market is that people have a relatively positive attitude. They’re concerned about supply chain issues in some cases, but they’re doing OK.

Ryssdal: Alright, so let me ask you to step way back from the small businesses that you and your staff deal with on a daily basis. And I’m going to take you to Jay Powell and the Federal Reserve, right? Interest rates are up, they’re probably gonna go higher. What happens at a community bank, when the Fed says, OK, 50 basis points, half a percentage point. What happens?

Stewart: I think people jump to a conclusion. They read a headline that rates across the board are going to move, and that just isn’t true. Banks are going to set rates for both loans and deposits based, to a degree, on competition and also what they’ve got. Right now, we have lots of liquidity in the banking system. I was talking to two other bank CEOs just yesterday, and we all have lots of cash on our balance sheet, so we don’t need a lot of deposits. So I think there’ll be a lag to see deposit rates go up, but likewise, you won’t see every loan rate go up. I mean, if you got one of those great low-rate mortgages, that’s not going to change. If you have a variable, we’re gonna see an adjustment over time, but not many people took variable rate loans. 

Ryssdal: Yeah, although I did see the other day that Adjustable Rate Mortgages are coming back. But let me ask you this, about that competition thing you said, right? So the Federal Reserve raises the federal funds rate, and you and your colleagues in the banking sector say, “Well, the guy down the street is only given three-tenths percent. So if I give, you know, point three, five, then I can get a little bit more business.” Is that what we’re talking about?

Stewart: To a degree, but it’s a little bit more nuanced than that. We take in deposits because that’s a great service to customers and most of them either earn an interest rate, or they’re like checking accounts that are free, right? [Then] we deploy that money in loans to our clients. If we’ve got more deposits than we’ve got loans, there’s not a lot of incentive to pay up for more deposits.

Ryssdal: And I guess that’s why when my mother calls me and says, how come I’m not getting another half percent of my certificates of deposit? I guess that’s the answer, right?

Stewart: Yeah, exactly. And it’s not because there’s any kind of crazy price-fixing, or that kind of thing. It’s just that because of the stimulus and because people were locked down and cautious, there’s a lot of cash sitting on bank balance sheets, and so that need to raise rates to keep making loans just isn’t there yet. Will we begin to see it? Sure.

Ryssdal: That’s, that’s what I was gonna say. Because the Fed’s gonna raise rates maybe a couple more times this year, and at some point, it’s going to trickle down, right?

Stewart: It’s just a lag, correct.    

Ryssdal: Yeah.

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