The Watchman Letter: The Interest Rate Paradox with the Wall Street Banks
The recent rally in Banks Stocks shows that Fund Managers and Retail Investors believe rising in Interest Rates are good for the Banks. The belief that Banks can charge higher rates to increase profits. Sounds Good, but why did the Federal Reserve drop interest rates to zero-.25% in 2008 ? Answer: So the Insolvent Wall Street Banks would inject billions into the Global Financial System at no cost thus generating liquidity into the Markets.
The two main benefits of ZIRP for the Banks:
- The Banks borrowing from the FED at zero, then buying US 10YR Bonds that were paying 2.4% Interest. Easy Profits at the click of a mouse.
- The Banks incurring very little costs for Depositors and Savings accounts.
In 2008 the Media's narrative was zero interest rates were good for the Wall Street Banks.
Today the Media's narrative is rising Interest Rates are good for the Banks.
Only one statement can be True, thus the Paradox.
If I asked the Wall Street Bankers which FED's Interest Rates they prefer, all would answer ZIRP.