If you had any doubt that it’s just a matter of time before the Fed raises interest rates, a story in Friday’s edition of The Wall Street Journal should make the outlook pretty clear.
“. . . (t)he dealers (who work directly with the Fed) saw September as the most likely meeting at which the Fed will begin reducing its bond purchases,” it said.
For those not familiar with the Federal Reserve’s policies, which it uses to raise or lower interest rates, it has several choices.
It can simply raise or lower the discount rate, which is the rate banks charge one another on what are known as overnight loans. Raising that rate will usually have the effect of increasing all short-term loans across the board. But the strategy used by the Fed for the past couple of years involved buying bonds – most likely mortgage bonds – from member banks. These are banks with which the Fed commonly does business, often for this very purpose of changing interest rates.
The effect of buying bonds from its member banks is to exchange cash for bonds from the banks. That pumps money into the banks, which in turn can be loaned out to other financial institutions. That money gets into the “system” – in fact almost the entire economy – thereby pushing most interest rates down.
There is, however, one category of loans whose rates do not drop significantly, if at all. Those are the notorious “payday” loans, made to borrowers who have nowhere else to go. The rates on those payday loans can be as high as 30 percent annually, but that is just the beginning.
If the consumer cannot pay back the loan on time – usually when they expected their paycheck, the amount owed increases, often 20 percent, 30 percent or more. At that point, the borrower owes an amount even more difficult to pay and this may create a depressing feeling of “no end in sight.”
What was news to me was that these companies are themselves financed by major banks such as Bank of America.
Sad – isn’t it – how many financial institutions benefit at the expense of the worst off among us.
Aside from the poor, low-end borrowers who are already paying sky-high rates, if the FOMC – the Federal Open Market Committee – doesn’t change its mind, mortgage rates. car loans, commercial loans and most every loan out there will continue going up.
I say “continue” because lenders haven’t waited for the Fed to move.
Bud Stevenson, a stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.