Over the last several years interest rates have been very low following a steady decline in the Federal Reserve’s rediscount rate and the prime rates charged by banks. This has encouraged individuals and corporations to increase their debt, and their demand for goods and services. This has led to higher employment, and higher demand, leading to increasing inflationary pressure to the point of alarm. This is a challenging job for the Federal Reserve Bank, the Central Bank of the United States.
The major function of the Federal Reserve Bank is to keep inflation within bounds (in the 2.0 to 3.5 % range), and to keep unemployment at a viable level preventing inflation or recession. The Fed uses three tools mainly to accomplish its goals: Increases or decreases in the Discount Rate, increases or decreases in the Money Supply, and Moral Suasion.
We don’t hear very much about Moral Suasion nowadays, so much so that I would venture that many readers will not know what it means. It is the strength that the Chairman of the Federal Reserve System has in using his jawbone to signal Federal Reserve possible policies thus effecting changes in behavior without implementing those policies. Increases in the money supply signal a desire for expansion, done by buying back Government Issues, thus increasing banks’ balances with the Fed. The opposite occurs when the Fed sells parts of its holdings, reducing banks’ balances. Banks’ balances with the Fed are part of their Reserves, and the Fractional Reserve System is the basis for the creation of credit in the banking system. At least this is what I got out of my Econ 360 Money and Banking Course more tha sixty years ago when I was pursuing a degree in Economics.
For most of the last fifteen years interest rates have been falling to the point where many folks were able to get mortgages at 3% rates and sometimes lower. Banks were paying negative interest on deposits, certainly when compared with the buying power of the dollar and the inflation rate has risen to over 10% on many items, with unemployment hovering around 3.5%. Simultaneously the Stock Market has been performing gloriously with Index values doubling over the past ten years according to the Chicago Board of Options Exchange.
These last three years have been challenging for most sectors in the USA. Covid was very frightening, inflation was at an alarming level, demand continued to be high, and employment was also at a high level. The Fed chose to give us dosages of very heavy medicine in the form of ten discount rate increases, sometimes as high as ¾ of 1% over the past two years.
Fed Chairman Jerome Powell has surely caught our attention. Unemployment has fallen from a high of 6.1% in 1970 and now stands at 3.7%. (US Bureau of Labor Statistics). The rate of Inflation is down to 3.9% and is expected to reach 3.3% by 2024.Through a series of almost monthly increases the Prime Rate in the US has gone from 3.25% on3/16/2022 to 8.25% on 5/4/2023. Single family 30 year mortgages rates were 3.5%in November 2012, and 2.70% to 3.10 % in 2021. The rate jumped to 5.30% in May 2022 and was generally 8.5 % in June 2023. Credit Card Rates present difficulties in averaging but up to May 2023 a Credit Score around 660 to 670 attracts between 26% to 30 % per annum on outstanding balances, up about 6.00% this year. This means that on average if you have a balance of $10,000.00 on your Credit Cards you will be paying $ 600.00 more in interest charges this year. An associate advises that a friend showed him a recent offer of credit at approximately 40% from a Credit Card Company.
What is the takeaway from all the above? All the burdens seem to fall on the median income and lower income workers. Increases in things like food and clothing prices, rents, gasoline, Used Car prices, toiletries, Child Care, strike hardest on this sector. Then the corrective measures lead to higher mortgage costs, higher credit card payments, higher down payments to buy a house, continued stress on attempts to save for the future, inability to benefit from the new higher interest rates on Savings, and the advantages of switching to stocks when interest rates on Savings are low. Things could be a lot worse I suppose, but this is America folks, the land of attainable dreams. Our Policies need a fresh look with malice towards none and beneficence to all.