Rising Interest Rates, Good for Financials?.. I call BS

tesseractmatt (25)in #money • 7 years ago (edited)

Can someone please explain to me how a rising federal funds rate is good for banks or the financial sector in general?

Yes, the banks earn more interest on their cash holdings as the spread between what they earn and the paltry yields they pay out to their depositors increases. Understood.

However, lets look at the other side. Citizens do not get to borrow money at the federal funds, short term rate, that privilege is reserved for large financial institutions. So while the banks can borrow money at less than 1% interest, "the people" (if they are lucky) can get a mortgage at 3-4-5%. Maybe some can get a rate around 2%, but that is as good as it gets and never mind mortgages, lines of credit at 5-10-15%, credit cards at 19-20-25%! The banks pocket the spread (minus delinquencies). Very profitable.

As the federal funds rates rise, it will eat in to these massive spreads. Conventional wisdom says that as the federal funds rate goes up, the lending rates of the banks will go up by an even greater amount, thereby increasing the spread and the banks profits. Trouble is banks know they can't raise their rates right now. The people are on the brink of insolvency as it is. Rising interest rates would wipe out home owners, the auto industry, and debtors in general.

Just look at what is happening in the housing market right now. Sales are down "bigly". Auto industry? Shitting the bed. Household debt is at or near all time highs. Do you think banks can really raise their interest rates right now?

Regardless of whether the FED raises rates in June, the commercial banks rates are stuck right where they are, so their borrowing/lending spreads are not going to increase, if anything they will shrink, thereby reducing the profitability of the banks.

An increased fed funds rate, good for financials? Yeah I call Bullshit.

Not convinced? Check out the chart below.
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