Why the Fed Won’t Raise Interest Rates This Week, But Who Would Win If They Did

Before we step into this Alice-In-Wonderlandish warehouse of paranoia and mystery, I’ll give my opinion on the second topic in this post title, which is not a myth by the way.  So far.

Who wins when the Federal Reserve raises the short term rate it charges banks?  (And that’s an important point; the Fed doesn’t- and can’t -alter the rate you pay on your mortgage, credit cards or car loan.  It can only raise the overnight rate banks earn or pay, as the case may be, on their surplus or short balances.  The current rate is 0.25%.).  Historically, and oddly, big banks, brokerages and insurance companies win when short term rates rise.  Suppose the Fed triples the Fed fund rate from 0.25% to 0.75%.  Although still essentially zero, borrowers become psychologically fertile for similar rate increases.  “Oh, the Fed tripled interest rates!  But my bank only raised my credit card rate from 8% to 12%.  Lucky me”.  So rather than suffering from an increase in short term rates, the big lenders actually cash in.  That’s my theory, anyway, and that’s why I think there is substantial pressure from that community on the Fed to raise its rate.

Theoretically the Fed only raises rates in the face of an improving economy to moderate the effects of inflation.  We don’t really have an improving economy.  And we certainly wouldn’t have one if the cost of capital increases right now.  So no rate increase this week.

Your Constructive Comments are Welcome!

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