On December 16, the Federal Reserve Board announced short-term interest rates would be rising for the first time in nearly a decade. The move means mixed results for the states and localities that borrow money in the municipal market, according to a recent article in Governing. The board announced a scheduled rate hike of one-quarter percent, the first of several small rate hikes anticipated in 2016.
For issuers of municipal bonds, “the rate hike has no immediate implications on any outstanding government debt, but it will likely place a slightly higher price tag on the cost of issuing debt in the coming year.” However, the move is not expected to have a dampening effect on the municipal bond market as a whole because any government refinancing its debt will still be doing so at a significantly lower interest rate to generate savings.
In addition, the Fed’s decision only impacts short-term interest rates, not long-term ones. At times a hike in short-term rates “can actually cause a downward tick in long-term rates – saving money for governments that can afford to issue long-term debt.” This is because when short-term interest rates are increased, it can dampen the impact of inflation, which is what plays the larger role in setting long-term interest rates.
The article is online at www.governing.com/topics/finance/gov-fed-interest-rate-hike-muni-market.html.