The Good, the Bad and the Ugly – How Does Interest Rate?

   

“They don’t want the stock market to go up another 10% from here.” 

Johns Hopkins economist Jonathan Wright on the Federal Reserve Caught in the Middle

When low interest rates made slorping hogs out of corporate America, borrowing cheap money to fund mergers, acquisitions, expansion, a whole lot of senior managers made a whole lot of wasteful decisions, and income inequality and real estate prices soared for average consumers. Banks still wouldn’t lend much to small businesses, and our nation’s refusal to tax wealth – the only real solution to a more balanced budget – and the low interest rates on our federal deficit borrowings – encouraged inane decisions to cut taxes for the rich more palatable. So, the Trump era added trillions of dollars to our deficit (dropping the federal corporate tax rate from 35% to 21% in 2017), effectively passing on any additional interest on our national debt to all taxpayers. A reverse Robin Hood, sock it to the middle and lower classes so that rich taxpayers could get… richer.

So those self-same MAGA Republicans who cut those tax rates for the rich, shifted the cost of those huge benefits only for the ultra-rich, over to the rest of us. And now, they are clamoring to cut those deficits by decimating “wasteful entitlements” – pledging to cut Social Security and Medicare and let autocracy the world over rise unchecked – so that their billionaire contributors can return to the Big Slorp. Effectively: enjoying absurd wealth while refusing to pay proportionate taxes on that accumulation of trillions and trillions of dollars of new net worth enhancers… while the rest of us pay for it as corporate profits have soared.

So here sits the Federal Reserve, holding rates steady at the highest numbers in decades, but hinting a reduction is in the offing soon. States that have been pockets of high-level employment, mostly in the financial and tech sectors, are watching unemployment rates significantly about the national average. Layoffs define the new normal as prime office space in these urban areas lies vacant, office buildings are plummeting in value, slamming the banks (mostly local) that funded the construction/acquisition of these downtown behemoths into uncertainty. Yes, in local communities where local banks funded office towers that are now worth less than their outstanding mortgages, bank failure looms.

For the biggest of the big, they often fund much of their borrowings with commercial paper and much less with traditional bank loans. Some of this paper, bearing low interest, is long term debt that doesn’t reflect the higher fed rates that impact most of us. Even though not directly controlled by the fed, you can see the results in higher credit card interest rates, commercial lending (like buying or leasing a car), student loans and absurdly high mortgage rates that hurt new buyers and make those holding older mortgages smile. In a simple analysis, the younger you are, the more recently you joined the job/housing market, the worse off you are. Gen Z is shedding hope faster than snow-bound dog sheds its winter coat. Short term debt is exceptionally costly to most of us.

Justin Lahart, writing for the March 21st The Wall Street Journal, adds: “The Federal Reserve is still aiming to lower interest rates later this year, and for many U.S. households and small businesses those rate cuts can’t come soon enough. But for big companies able to tap the corporate bond market, and for investors riding a rising stock market, relief from the Fed doesn’t seem all that necessary… Changes in the Fed’s benchmark fed-funds rate have a strong effect on a variety of short-term rates, such as those on bank deposits and money-market funds. But their influence on longer-term rates, such as those on corporate bonds, can be more tenuous…

“[The fed is crushing the little guy with restrictive rates.] The idea that the Fed’s target rate is restrictive is driven by a variety of models, many of them versions of the Taylor rule put forth by the Stanford economist John Taylor. These calculate where the Fed should set rates based on its inflation target, current inflation, estimates of how much slack there is in the economy, and estimates of where rates will eventually need to settle. Three versions of the rule calculated by the Atlanta Fed suggest the Fed’s target rate should now be 3.9% to 4.7%.

“A lot of Americans probably don’t need to consult the Taylor rule to conclude rates are restrictive: They can just look at the interest their credit-card accounts are charging. The average interest rate on commercial bank credit-card plans in the fourth quarter was 21.5%, according to the Fed. That is the highest in the 30 years of available data, and compares with just 14.9% in the fourth quarter of 2019, right before the pandemic hit.

“Recent research from former U.S. Treasury Secretary Larry Summers and co-authors suggests that households’ high borrowing costs might even help explain what has been a bit of a mystery: Why, despite a strong job market and moderating inflation, consumer moods remain so dour.

”Small businesses, too, often tap credit cards, with a recent Fed survey finding that 56% of them regularly used cards for financing—more than any other source of credit. Lines of credit, also commonly used by small businesses, are also tied to short-term rates. Constraints on small businesses can translate into less robust job growth. Companies with fewer than 100 employees account for about a third of private employment, while research has shown that young, small businesses on the way to becoming larger ones are a deciding factor in U.S. job growth.” The current fed rates hold steady at a range of 5.25% to 5.5%.

The MAGAns love all this, and even though the President has zero control over setting these interest rates, they know he will be blamed for all the consequences – and there are lot of them – adding to their Trumpian claim that “he alone can fix it” combined with the bizarre notion that Trump is a savvy businessman. Biden can’t, but Trump can?! Despite his numerous and proven fraud claims, a man who claimed he had hundreds of millions of cash but now cannot post his bond in the NY court (asking for donations from his constituents) and who added trillions to the federal deficit via his tax cut which only benefitted the rich, Trump is the go-to economy expert? Until the fed can figure out how to cut rates without restoring hog-slorping cheap money for billionaires, no president alone can fix it. After all, a true assessment is a simple Trumpian reality: “Elect me and I can make income inequality a whole lot worse.”

I’m Peter Dekom, and the political mess you see over the economy is the willingness of most Americans to believe in unjustified “elect me” slogans, outsourcing their opinions to mendacious candidates who will actually make the economic reality for most of us much, much worse.