A high school classmate shared with me her concern about looking for higher yielding accounts. Baby boomers closing in on retirement are either trying to accumulate more cash via compounding interest while saving more of our incomes and sticking those savings into accounts.
Meanwhile the media is guiding our eyeballs and eardrums to the messaging from the Federal Reserve System. The seven or eight cuts to the Federal Reserve’s federal funds rate forecasted for 2024 are not expected to materialize. The Federal Reserve has signaled three cuts to the overnight rate amounting to a total of 75 basis points. What that means is that the current range for the overnight rate is expected to fall to 4.5% to 4.75% from the current 5.25% to 5.50% range.
For depositors like you and me, rate changes by the Fed influence the rates we pay on mortgages and credit cards along with the rates we earn on savings or high yielding checking accounts. This ripple effect results from lenders passing on a decrease in their overnight borrowing costs from other banks to bank borrowers and depositors by reducing the lending rates and increasing savings rates.
Also, a borrower sees an increase in the collateral they bring to a lender when the fed funds rate decreases. As interest rates fall, the value of collateral increases and higher value collateral not only reduces the bank’s risk for lending, but higher value collateral may also result in borrowers obtaining more funds.
However, depending on the counterparty risk faced by the lender, a borrower is not guaranteed a lower rate when there is a decrease in the overnight rate. How good is the borrower’s collateral? How stable is the borrower’s income? Is the borrower employed in a set of workers threatened by replacement from artificial intelligence?
In other words, what are the chances that lending rates will actually increase in the face of a decreased federal funds rate?
I have not found any support in the law for a mandatory passing of borrowing cost savings from deposit institutions to their customers. The “ripple effect” seems to be a business judgment manifested by the fed funds rate.
The narrative by the Fed targeting borrowers and depositors is less conflicted and more disconnected. The Fed tells a story that monetary policy as determined by the central bank will achieve the dual mandate of stable consumer prices and maximum taxpayer employment after the appropriate amount of time. The message that is supposed to emanate from that story is that an independent agency of the Congress is controlling the money supply such that an optimal amount of taxpayers will find work and be able to purchase goods and services sufficient for their household needs. The story, if it is being listened to by anyone besides financial reporters and traders, is not resonating at the grassroots.
The Fed should simplify the narrative. It should go like this: We are an agency tasked with doing Congress’ dirty work of determining the value of money. We regulate and supervise banks whose task is to, after determining counterparty risk, get as much currency into consumer hands by lending it out. Hopefully you, the consumer, will put the money to such use that the economy expands.
Alton Drew
31 March 2024
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Alton Drew 