Are US interest rates too low?
Cheap money isn't working; it may be time for the Fed to boost rates and make lending more profitable, says Boenning's Jason O'Donnell
Are US interest rates too low?
Joseph N. DiStefano
Even with mortgage rates falling to record lows (below 4%), the Federal Reserve's cheap money policy doesn't look like it's reviving the US economy. To the contrary: While speculators have exploited the Fed's low rates by borrowing almost-free cash to bid up prices for food and metals, "loan growth is becoming more difficult to come by," says Jason O'Donnell, bank analyst at Boening & Scattergood in West Conshohocken.
Federal Reserve boss Ben Bernanke's "twist" investments designed to cut long-term loan rates further may convince more homeowners to refinance their mortgages, but it's not making new or refi home loans any more attractive for banks to hold - to the contrary, even banks that held loans are now selling them - "and commerical loan demand has not rebounded," O'Donnell told me, after trimming another penny from his estimate for Bryn Mawr Trust profits-per-share for next year, and 16 cents from his 2012 projection. Bernanke's move means Bryn Mawr, like other banks, will make less than the current 4% net interest margin, on the cost of raising money vs the cost of lending it, O'Donnell told clients in a report. He also expects loan growth will drop from his previous more robust recovery estimate of 8% this year and 10% next year, to just 6% this year, 8% next year. What is the Fed thinking? "Good question," O'Donnell told me. "What we've seen from the Fed so far has not been effective in stimulating demand. It hasn't been effective in stabilizing the home market. "It may be healthy for our economy to have interest rates a little higher" so the cheap money doesn't end up fueling "another asset bubble," like the commodity price explosion of the past two years, or the Internet-telecom stock bubble of the early 2000s - or the home mortgage bubble of the mid-2000s. Higher rates would fuel bank profits - which are already respectable - but it would also give lenders an incentive to lend more and stimulate businesses to hire, O'Donnell concludes.
WALL ST BROKE AMERICA NOW AMERICA WILL BREAK WALL ST
Who's paying you to write this? Sounds like a setup to hike the interest rates on loans knowing full well that even if they hike the rates, the (non)lending practices of late will remain the same.— puzzled2- This is the dumbest analysis I've read in a while. Newsflash Mr. O'Donnell, the European Central Bank already raised rates July in the face of slowing growth and are now suffering the consequences of exacerbating an already tenuous economic situation. Raising interest rates would a) hurt exports by strengthening the dollar b) reduce consumer spending, slowing growth and increasing unemployment c) increase real debt in an already overextended country.— CoolZanna
- it doesn't appear that anybody in the pie in the sky world of Washington/NYC/name the city/bank cares or knows about the everyday person and what he's going through.
azn layoffs announced today,...
i wonder where they're expecting revenues to come from to support them?— alde - You guys aren't wrong, or not completely wrong (except maybe for Puzzled), but fact remains: low rates are wrecking small banks, which still make a lot of the loans that neighborhood, local and start-up businesses depend on. If rates were higher it would suck in many ways, but it would also help the surviving small banks to make the loans they and their borrowers need, in competition with the megabanks, which with their notorious trading desks and investment operations can more easily hedge interest rate risk.— Joe D
