Tag: Federal Reserve

Federal Reserve restricts Wells’ growth

Responding to recent and widespread consumer abuses and other compliance breakdowns by Wells Fargo, the Federal Reserve Board on Friday announced that it would restrict the growth of the firm until it sufficiently improves its governance and controls. Concurrently with the Board’s action, Wells Fargo will replace three current board members by April and a fourth board member by the end of the year.

In addition to the growth restriction, the Board’s consent cease and desist order with Wells Fargo requires the firm to improve its governance and risk management processes, including strengthening the effectiveness of oversight by its board of directors. Until the firm makes sufficient improvements, it will be restricted from growing any larger than its total asset size as of the end of 2017. The Board required each current director to sign the cease and desist order.

“We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again,” Chair Janet L. Yellen said. “The enforcement action we are taking today will ensure that Wells Fargo will not expand until it is able to do so safely and with the protections needed to manage all of its risks and protect its customers.”

In recent years, Wells Fargo pursued a business strategy that prioritized its overall growth without ensuring appropriate management of all key risks. The firm did not have an effective firm-wide risk management framework in place that covered all key risks. This prevented the proper escalation of serious compliance breakdowns to the board of directors.

The Board’s action will restrict Wells Fargo’s growth until its governance and risk management sufficiently improves but will not require the firm to cease current activities, including accepting customer deposits or making consumer loans.

Emphasizing the need for improved director oversight of the firm, the Board has sent letters to each current Wells Fargo board member confirming that the firm’s board of directors, during the period of compliance breakdowns, did not meet supervisory expectations. Letters were also sent to former Chairman and Chief Executive Officer John Stumpf and past lead independent director Stephen Sanger stating that their performance in those roles, in particular, did not meet the Federal Reserve’s expectations.

Greenspan Warns Of Rates Rises

Alan Greenspan, the former Fed Chair, speaking on Wednesday on Bloomberg Television said “there are two bubbles: We have a stock market bubble, and we have a bond market bubble”.

This at a time when US stock indexes remain near record highs and as the yields on government notes and bonds hover not far from historic lows.

As the Fed continues to tighten monetary policy, interest rates are expected to move up in coming years.

At the end of the day, the bond market bubble will eventually be the critical issue, but for the short term it’s not too bad

But we’re working, obviously, toward a major increase in long-term interest rates, and that has a very important impact, as you know, on the whole structure of the economy.

What’s behind the bubble? Well the fact, that, essentially, we’re beginning to run an ever-larger government deficit.

Greenspan said. As a share of GDP, “debt has been rising very significantly” and “we’re just not paying enough attention to that.”

“Irrational exuberance” is back!

Fed Holds, But Signals More Rises Ahead

The Fed held their target range but confirmed its intent to lift rates ahead at Yellen’s last meeting as head. The bank signalled that it would push ahead on its monetary policy tightening path as economic activity has been rising at a solid rate, while inflation remained low but is expected to “move up” in the coming months. Most analysts suggest 2-3 hikes this year. The T10 bond yield continues to rise and is highest since 2014. Expect rates to go higher, putting more pressure on international funding costs.

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

How Fiscal Realities Intersect with Monetary Policy

From the St. Louis Fed On The Economy Blog.

How are government deficits financed, and what are the implications for monetary policy and inflation?

The deficit is defined as the difference between expenditures (including the interest paid on debt) and revenues. If the difference is negative, we get a surplus.

Between 1955 and 2007, the deficit of the U.S. federal government averaged about 1.9 percent of gross domestic product (GDP). In the decade since, the deficit averaged about 5.3 percent of GDP. Roughly two-thirds of this increase is attributable to larger expenditures.

Federal Debt Expansion

Deficits are financed by issuing debt. Since 2007, the federal debt in the hands of the public has grown at an average annual rate of 11 percent.1 As a share of GDP, it went from about 30 percent in 2007 to almost 64 percent as of the end of fiscal year 2017.2

According to the Financial Accounts of the United States, about 40 percent of this debt expansion was absorbed by foreigners, mostly in Japan and China.3

Before Congress approved the tax cut package in December, deficits and the debt were expected to grow significantly over the next decade.4 The new tax plan is expected to add further to the deficit. Though estimates of how much have varied widely, the most recent put the increase in the deficit over the next 10 years at about 10 percent.5,6

What Can Monetary Policy Do?

By influencing interest rates, the Fed can affect the servicing cost of debt. The current path of monetary policy normalization will imply generally higher interest rates, which will add to the deficit and require the Treasury to issue even more debt, raise taxes or reduce expenditures.

Federal revenues are supplemented by Federal Reserve remittances. These have been unusually large in recent years, about 0.5 percent of GDP, due to the Fed’s large balance sheet. Monetary policy normalization contributes to the expected increase in the deficit, since remittances are expected to decline to historical levels as the Fed’s balance sheet contracts.

The burden of debt can also be alleviated with higher inflation. This is not unprecedented in the United States. For example, after World War II, high inflation was used to finance part of the accumulated debt.7 Arguably, in the post-Paul Volcker era, the Fed has enjoyed increased independence and has not been very accommodative to the Treasury.

Inflation Becoming a Fiscal Phenomenon

However, as government debt has increasingly become more widely used as an exchange medium in large-value transactions (either directly or indirectly as collateral), the control of the “money” supply has shifted away from the Fed. In other words, the more cash, bank reserves and Treasuries resemble each other, the more inflation depends on the growth rate of total government liabilities and less on the specific components controlled by the Fed (i.e., the monetary base).

Thus, inflation becomes more of a fiscal phenomenon. Traditional monetary policy tools, such as swapping reserves for Treasuries, may be less effective in controlling it.

Though government debt has expanded significantly in recent years and is expected to continue growing, inflation and inflation expectations have not diverged far away from the Fed’s target of 2 percent annually. The likely reason is that demand for government liabilities has kept pace with the growth of the supply.

In this sense, during and after the financial crisis of 2007-08, there was a big appetite for U.S.-dollar denominated safe assets. As mentioned at the beginning of this post, 40 percent of the debt increase since the crisis has been absorbed by foreigners.

The high demand for U.S. Treasuries may continue or may reverse. If taste for U.S. debt declines, the projected deficits (with their associated debt expansion) may imply an increase, potentially significant, in inflation in the long run.

In this last scenario, the Fed would face a difficult challenge if facing a strong-headed Treasury and Congress that refuse to lower the deficit in the long run. Increasing interest rates—as during the Volcker disinflation, but now in an era of liquid government debt—may only exacerbate the deficit problems and do little to lower inflation.

Notes and References

1 The official figures of “Debt in the hands of the public” include holdings by the Federal Reserve Banks. I have netted those out since we are looking at the consolidated government budget.

2 The U.S. government’s fiscal year begins Oct. 1 and ends Sept. 30 of the subsequent year and is designated by the year in which it ends.

3 Martin, Fernando. “Who Holds the U.S. Public Debt?” Federal Reserve Bank of St. Louis On the Economy Blog, May 11, 2015.

4 Martin, Fernando M. “Making Ends Meet on the Federal Budget: Outlook and Challenges.” The Regional Economist, Third Quarter 2017, pp. 16-17.

5 For example, see Jackson, Herb. “Deficit could hit $1 trillion in 2018, and that’s before the full impact of tax cuts,” USA Today, Dec. 20, 2017; and The Associated Press. “The Latest: Estimate says tax bill adds $1.46T to deficit.” Dec. 15, 2017.

6 The Joint Committee on Taxation, the Senate’s official scorekeeper, estimates the deficit increase at about $1.5 trillion; the committee’s macroeconomic analysis of the “Tax Cuts and Jobs Act” is available here (JCX-61-17).

7 Postwar inflation (1946-1948) is estimated to have resulted in a repudiation of debt worth about 40 percent of output. See Ohanian, Lee E. The Macroeconomic Effects of War Finance in the United States: Taxes, Inflation, and Deficit Finance. New York, N.Y., and London: Garland Publishing, 1998.

Household Spending Remains Key to U.S. Economic Growth

From The St. Louis Fed On The Economy Blog.

Household-related spending is driving the economy like never before, according to a recent Housing Market Perspectives analysis.

Since the U.S. economy began to recover in 2009, close to 83 percent of total growth has been fueled by household spending, said William R. Emmons, lead economist with the St. Louis Fed’s Center for Household Financial Stability.

“Hence, the continuation of the current expansion may depend largely on the strength of U.S. households,” noted Emmons.

An Examination of the Current Expansion

In July, the U.S. economic expansion entered its ninth year, and it should soon become the third-longest growth period since WWII, Emmons said. He noted that it would become the longest post-WWII recovery if it persists through the second quarter of 2020.

However, the current expansion has been weak and ranks ninth among the 10 post-WWII business cycles, as shown in the figure below.1 “Only the previous cycle, ending in the second quarter of 2009, was weaker,” he said. “That cycle was dominated by the housing boom and bust and culminated in the Great Recession.”

business cycles

The Changing Composition of Economic Growth

Emmons noted that the composition of economic growth also has changed in recent decades and has generally shifted in favor of housing and consumer spending,2 as shown in the figure below.

GDP Growth

“Only during the brief 1958-61 cycle did residential investment—which includes both the construction of new housing units and the renovation of existing units—contribute proportionally more to the economy’s growth than it has during the current cycle,” Emmons said.

He noted that, perhaps surprisingly, homebuilding subtracted significantly from economic growth during the previous cycle even though it included the housing bubble. “The crash in residential investment was so severe between the fourth quarter of 2005 and the second quarter of 2009 that it erased all of housing investment’s previous growth contributions,” he said.

He noted that residential investment typically subtracts from growth during recessions. Thus, its ultimate contribution to the current cycle likely will be less than currently shown because the next recession will be included as part of the current cycle.

At the same time, he said, personal consumption expenditures (i.e., consumer spending) also have been very important in recent cycles.

Emmons noted that consumer spending has contributed close to 75 percent of overall economic growth during the current cycle. The share was higher in only two other cycles. “Not surprisingly, strong residential investment and strong consumer spending tend to coincide when households are doing well,” he said.

Notes and References

1 The current business cycle began in the third quarter of 2009 and has not yet ended. The provisional “end date” used is the second quarter of 2017, which was the most recent quarter ended at the time this analysis was done.

2 The other components of gross domestic product (GDP) are business investment, exports and imports of goods and services, and government consumption expenditures and gross investment.

Digital Drives US Consumer Remote Payments Higher

US consumers are making more “remote” payments according to new payments data collected by the Federal Reserve. Remote general-purpose credit card payments, including online shopping and bill pay; all enabled by digital.

The number of credit card payments grew 10.2 percent in 2016 to 37.3 billion with a total value of $3.27 trillion. The increase in the number of payments compares with an 8.1 percent annual rate from 2012 to 2015 and was boosted by continued strong growth in the number of payments made remotely. Remote general-purpose credit card payments, including online shopping and bill pay, rose at a rate of 16.6 percent in 2016. More broadly, remote payments in 2016 represented 22.2 percent of all general-purpose credit and prepaid debit card payments, up 1.5 percentage points from an estimated 20.7 percent in 2015. By value, remote payments represented 44.0 percent of all general-purpose card payments, a slight increase from an estimated 42.9 percent in 2015.

The 2016 data on trends in card payments, as well as Automated Clearing House (ACH) transactions and checks, are the product of a new annual collection effort that will supplement the Federal Reserve’s triennial payments studies. Information released today compares the annual growth rates for noncash payments between 2015 and 2016 with estimates from previous studies.

Key findings include:

  • Total U.S. card payments reached 111.1 billion in 2016, reflecting 7.4 percent growth since 2015. The value of card payments grew by 5.8 percent and totaled $5.98 trillion in 2016. Growth rates by number and value were each down slightly from the rates recorded from 2012 to 2015.
  • Debit card payment growth slowed by number and value from 2015 to 2016 as compared with 2012 to 2015, growing 6.0 percent by number and 5.3 percent by value compared with a previous annual growth rate of 7.2 percent by number and 6.9 percent by value.
  • Use of computer microchips for in-person general-purpose card payments increased notably from 2015 to 2016, reflecting the coordinated effort to place the technology in cards and card-accepting terminals. By 2016, 19.1 percent of all in-person general-purpose card payments were made by chip (26.9 percent by value), compared with only 2.0 percent (3.4 percent by value) in 2015.
  • Data also reveal a shift in the value of payments fraud using general-purpose cards from predominantly in person, estimated at 53.8 percent in 2015, to predominantly remote, estimated at 58.5 percent in 2016. This shift can also be attributed, in part, to the reduction in counterfeit card fraud, the sort of fraud that cards and card-accepting terminals using computer chips instead of magnetic stripes help to prevent.
  • From 2012 to 2015, ACH network transfers, representing payments over the ACH network, grew at annual rates of 4.9 percent by number and 4.1 percent by value. Growth in both of these measures increased for the 2015 to 2016 period, rising to 5.3 percent by number and 5.1 percent by value. The average value of an ACH network transfer decreased slightly from $2,159 in 2015 to $2,156 in 2016.
  • Data from the largest depository institutions show the number of commercial checks paid, which excludes Treasury checks and postal money orders, declined 3.6 percent between 2015 and 2016. By value, commercial checks are estimated to have declined 3.7 percent during the same period. The steeper decline in value versus volume suggests the average value of a commercial check paid has declined slightly since 2015.

Is Record High Consumer Debt a Boon or Bane?

From The St.Louis Fed on The Economy Blog.

Amidst of lot of captivating headlines over the last few months, one may have missed the news that consumer debt has hit an all-time high of 26 percent of disposable income, as seen in the chart below.

In just the past five years, consumer debt (all household debts, excluding mortgages and home equity loans) has grown at about twice the pace of household income. This has largely been driven by strong growth in both auto and student lending.

But what does this say about the economy? Is it a sign of optimism or a cause for concern?

Increasing Debt Levels

Rising household debt levels could mean that:

  • More Americans are optimistic about the U.S. economy.
  • More people are making investments in assets that generally build wealth, like higher education and homes.
  • Consumers have paid off their loans to qualify for new ones.

At the same time, higher debt levels could reveal financial stress as families use debt to finance consumption of necessities. It could portend new waves of delinquencies and, eventually, defaults that displace these kinds of investments. And rising family debts could slow economic growth and, of course, even lead to a recession.

Three Key Themes

This dual nature of household debt is precisely why the Center for Household Financial Stability organized our second Tipping Points research symposium on household debts. We did so this past June in New York, in partnership with the Private Debt Project

We recently released the symposium papers, which were authored by my colleagues William R. Emmons and Lowell R. Ricketts and several leading economists, such as Karen Dynan and Atif Mian. They offer fascinating insights about how, when and the extent to which household debt impacts economic growth.

Looking at all the papers and symposium discussions together, a few key themes emerged.

No. 1: Short-Term vs. Long-Term Debt

Despite an incomplete understanding of the drivers and mechanism of household debt, we learned that increases in household debts can boost consumption and GDP growth in the shorter term (within a year or two) but suppress them beyond that.

Whether and how household debt affects economic growth over the longer term depends on three things:

  • Whether family debts improve labor productivity or boost local demand for goods and services
  • The extent of leverage concurrently in the banking sector, which is much less evident today than a decade ago
  • The stability of the assets, such as housing, being purchased with those debts

No. 2: Magnitude of Risk

Even with record-high levels of consumer debts, most symposium participants did not see household debts posing a systemic risk to the economy at the moment, though trends in student borrowing, auto loans and (perhaps) credit card debts are troubling to those borrowers and in those sectors.

Moreover, rising debt can be a drag on economic growth even if not a systemic risk, and longer-term reliance on debt to sustain consumption remains highly concerning as well.

No. 3: Public Policy

Public policy responses should also be considered. Factors that could further burden indebted families and impede economic growth include:

  • Low productivity growth
  • Higher interest rates
  • New banking and financial sector regulations
  • Rising higher-education costs

Indeed, levels of household debt have often served as a reflection of larger, structural, technological, demographic and policy forces that help or harm consumers. It only makes sense, then, that policy and institutional measures must be considered to ameliorate debt levels and their impact on families and the economy.

After all, what’s good for families is good for the economy, and vice versa.

When Holding Cash Beats Paying Debt

From The US On The Economy Blog.

For families who are struggling financially, there are times when it is better to keep some cash on hand, even if they hold high-interest debt.

A recent In the Balance article highlights the importance of emergency savings to the financial stability of struggling households. It was authored by Emily Gallagher, a visiting scholar at the St. Louis Fed’s Center for Household Financial Stability, and Jorge Sabat, a research fellow at the Center for Social Development at Washington University in St. Louis.

The Struggle to Make Ends Meet

Many families continue to struggle to make ends meet, the authors said, noting a recent Federal Reserve survey that estimated that almost half of U.S. households could not easily handle an emergency expense of just $400.

Given this, they asked: “Should more families be encouraged to hold a liquidity buffer even if it means incurring more debt in the short-term?”

In explaining why it might make sense, for example, to keep $1,000 in a low-earning bank account while owing $2,000 on a high-interest-rate credit card, Gallagher and Sabat’s research suggests this type of cash buffer greatly reduces the risk that a family will:

  • Miss a rent, mortgage or recurring bill payment
  • Be unable to afford enough food to eat
  • Be forced to skip needed medical care within the next six months

Linking Balance Sheets and Financial Hardship

Gallagher and Sabat investigated which types of assets and liabilities predicted whether a household would experience financial hardship over a six-month period.

Their survey encompassed detailed financial and demographic results that covered two time-period observations for the same household: one at tax time, and the other six months after tax time.

“This feature of our data set is ideal for capturing the probability that a household that is currently financially stable falls into financial hardship in the near term,” the authors explained. “Furthermore, the survey samples only from low-to-middle income households, our population of interest for understanding the antecedents of financial hardship.”

They tracked families in the first survey who said they hadn’t recently experienced any of these four main types of financial hardship:

  • Delinquency on rent or mortgage payments
  • Delinquency on regular bills, such as utility bills
  • Skipped medical care
  • Food hardship (going without needed food)

Gallagher and Sabat also asked if the family had any balances in:

  • Liquid assets, such as checking and saving accounts, money market funds and prepaid cards
  • Other assets, including businesses, real estate, retirement or education savings accounts
  • High-interest debt, such as that from credit cards or payday loans
  • Other unsecured debt, such as student loans, unpaid bills and overdrafts
  • Secured debt, including mortgages or debts secured by businesses, farms or vehicles

Controlling for factors such as income and demographics, they then tracked whether the 5,000 families in the survey had suffered a financial shock that would affect the results.

Cash on Hand Matters Most

The authors found that having liquid assets or other assets always predicted lower risk of encountering hardship of any kind, while having debts generally increased the risk of hardship.

Liquid assets had the most predictive power, Gallagher and Sabat said. They noted that a $100 increase (from a mean of $6) was associated with a 4.6 percentage point reduction in a household’s probability of rent or mortgage delinquency.

Liquid assets also significantly reduced the likelihood of entering into more common forms of hardship. A $100 increase in liquidity was associated with declines in the rates of:

  • Regular bill delinquency (by 8.3 percentage points)
  • Skipped medical care (by 6.3 percentage points)
  • Food hardship (by 5.2 percent percentage points)

“These estimated effects are substantial relative to the probability of encountering each hardship,” they said.

Conclusion

“Our findings suggest that households should be encouraged to maintain at least a small buffer of liquid savings, even if the cash in that buffer is not being used to pay down high-interest debt,” Gallagher and Sabat concluded.

FED Lifts Rate As Expected

The FED has lifted the federal funds rate to 1.5% after their two day meeting – the third hike this year. The move was expected and had been well signalled.  This despite inflation still running below target, though they expect it will move to 2% later.  More rate rises are expected  in 2018.  This will tend to propagate through to other markets later.

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

Fed Keeps Countercyclical Capital Buffer at 0 percent

The Federal Reserve Board announced on Friday it has voted to affirm the Countercyclical Capital Buffer (CCyB) at the current level of 0 percent. In making this determination, the Board followed the framework detailed in the Board’s policy statement for setting the CCyB for private-sector credit exposures located in the United States.

The buffer is a macroprudential tool that can be used to increase the resilience of the financial system by raising capital requirements on internationally active banking organizations when there is an elevated risk of above-normal future losses and when the banking organizations for which capital requirements would be raised by the buffer are exposed to or are contributing to this elevated risk–either directly or indirectly. The CCyB would then be available to help banking organizations absorb higher losses associated with declining credit conditions. Implementation of the buffer could also help moderate fluctuations in the supply of credit.

The Board consulted with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency in making this determination. Should the Board decide to modify the CCyB amount in the future, banking organizations would have 12 months before the increase became effective, unless the Board establishes an earlier effective date.