Fox In The Hen House: Why Interest Rates Are Rising
Posted by freedomforall 6 years ago to Business
Follow the Money
If the Phillips curve, the inflation rate and loan growth don't explain the push for higher interest rates, what does? The answer was suggested in an April 12th Bloomberg article by Yalman Onaran, titled "Surging LIBOR, Once a Red Flag, Is Now a Cash Machine for Banks." He wrote:
The largest U.S. lenders could each make at least $1 billion in additional pretax profit in 2018 from a jump in the London interbank offered rate for dollars, based on data disclosed by the companies. That's because customers who take out loans are forced to pay more as Libor rises while the banks' own cost of credit has mostly held steady.
During the 2008 crisis, high LIBOR rates meant capital markets were frozen, since the banks' borrowing rates were too high for them to turn a profit. But US banks are not dependent on the short-term overseas markets the way they were a decade ago. They are funding much of their operations through deposits, and the average rate paid by the largest US banks on their deposits climbed only about 0.1% last year, despite a 0.75% rise in the Fed Funds rate. Most banks don't reveal how much of their lending is at variable rates or is indexed to LIBOR, but Oneran comments:
JPMorgan Chase & Co. (NYSE:JPM), the biggest U.S. bank, said in its 2017 annual report that $122 billion of wholesale loans were at variable rates. Assuming those were all indexed to Libor, the 1.19 percentage-point increase in the rate in the past year would mean $1.45 billion in additional income.
Raising the Fed Funds rate can be the same sort of cash cow for US banks. According to a December 2016 Wall Street Journal article titled "Banks' Interest-Rate Dreams Coming True":
While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward. . . . Bank of America . . . says a 1-percentage-point rise in short-term rates would add $3.29 billion. . . . [A] back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank's expected 2016 pretax profit . . . .
As observed in an April 12 article on Seeking Alpha:
About half of mortgages are . . . adjusting rate mortgages [ARMs] with trigger points that allow for automatic rate increases, often at much more than the official rate rise. . . .
One can see why the financial sector is keen for rate rises as they have mined the economy with exploding rate loans and need the consumer to get caught in the minefield.
Even a modest rise in interest rates will send large flows of money to the banking sector. This will be cost-push inflationary as finance is a part of almost everything we do, and the cost of business and living will rise because of it for no gain.
Cost-push inflation will drive up the Consumer Price Index, ostensibly justifying further increases in the interest rate, in a self-fulfilling prophecy in which the FOMC will say, "We tried - we just couldn't keep up with the CPI."
If the Phillips curve, the inflation rate and loan growth don't explain the push for higher interest rates, what does? The answer was suggested in an April 12th Bloomberg article by Yalman Onaran, titled "Surging LIBOR, Once a Red Flag, Is Now a Cash Machine for Banks." He wrote:
The largest U.S. lenders could each make at least $1 billion in additional pretax profit in 2018 from a jump in the London interbank offered rate for dollars, based on data disclosed by the companies. That's because customers who take out loans are forced to pay more as Libor rises while the banks' own cost of credit has mostly held steady.
During the 2008 crisis, high LIBOR rates meant capital markets were frozen, since the banks' borrowing rates were too high for them to turn a profit. But US banks are not dependent on the short-term overseas markets the way they were a decade ago. They are funding much of their operations through deposits, and the average rate paid by the largest US banks on their deposits climbed only about 0.1% last year, despite a 0.75% rise in the Fed Funds rate. Most banks don't reveal how much of their lending is at variable rates or is indexed to LIBOR, but Oneran comments:
JPMorgan Chase & Co. (NYSE:JPM), the biggest U.S. bank, said in its 2017 annual report that $122 billion of wholesale loans were at variable rates. Assuming those were all indexed to Libor, the 1.19 percentage-point increase in the rate in the past year would mean $1.45 billion in additional income.
Raising the Fed Funds rate can be the same sort of cash cow for US banks. According to a December 2016 Wall Street Journal article titled "Banks' Interest-Rate Dreams Coming True":
While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward. . . . Bank of America . . . says a 1-percentage-point rise in short-term rates would add $3.29 billion. . . . [A] back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank's expected 2016 pretax profit . . . .
As observed in an April 12 article on Seeking Alpha:
About half of mortgages are . . . adjusting rate mortgages [ARMs] with trigger points that allow for automatic rate increases, often at much more than the official rate rise. . . .
One can see why the financial sector is keen for rate rises as they have mined the economy with exploding rate loans and need the consumer to get caught in the minefield.
Even a modest rise in interest rates will send large flows of money to the banking sector. This will be cost-push inflationary as finance is a part of almost everything we do, and the cost of business and living will rise because of it for no gain.
Cost-push inflation will drive up the Consumer Price Index, ostensibly justifying further increases in the interest rate, in a self-fulfilling prophecy in which the FOMC will say, "We tried - we just couldn't keep up with the CPI."
The FOMC is composed of the Federal Reserve's seven-member Board of Governors, the president of the New York Fed, and four presidents from the other 11 Federal Reserve Banks on a rotating basis. All 12 Federal Reserve Banks are corporations, the stock of which is 100% owned by the banks in their districts; and New York is the district of Wall Street. The Board of Governors currently has four vacancies, leaving the member banks in majority control of the FOMC. Wall Street calls the shots; and Wall Street stands to make a bundle off rising interest rates.
BTW, while I respect the research the author has done to write the article, her conclusion is utter and complete socialist R-U-B-B-I-S-H !