Dream Maker Podcast: What To Do About Interest Rates?
Chris Floyd, President, and CEO of Dream First Bank of Syracuse and host of the Dream Maker podcast, invited an in-house expert to talk about interest rates and how they impact our money management efforts. Shane Vette, Dream First Bank CFO, has been in banking for over twenty years. He has experience managing large-scale assets ranging in value from $400-$450 million and all the way up to $20 billion-plus. He has a broad range of banking experience and understands how to manage money through good and challenging times.
In this episode, Shane gives an overview of what we can expect, how the federal reserve operates, and what its ongoing goals are with interest rates. We also cover how interest rates affect consumers and banks in the global economy.
Federal Reserve and Interest Rates
Shane explains how the current conversation about interest rates really started after the 2008 financial crisis when the Federal Reserve and the Federal Open Market Committee (FOMC) became more transparent. They decided to be more open in their communication about rates both to the markets and the world. As part of this initiative, they also started providing upper and lower bounds on their target rate. The “upper target” is the primary focus because that's the rate banks use when they make transactions with other banks.
In this discussion, it’s crucial to remember the purpose of the Federal Reserve. Congress has set a dual mandate for this institution: maximize employment and keep inflation under control. These principles guide much of their decision-making when it comes to rates. Shane talked about how we, at Dream First Bank, are constantly watching the broader economy to get a better idea of what will happen to interest rates. We can use these guiding principles to make rough predictions of what the future holds. For example, if inflation and consumer spending are high, we can expect the Federal Reserve to raise interest rates to cool the economy down.
Banks and Consumer Interest and Debt
One of the other terms you’ll often hear commentators discussing is the “yield curve.” According to Shane, the easiest way to think about the yield curve is that it’s the market’s expectation of future rates. The curve is the measure of the distance between the 2-year treasury yields and the 10-year treasury yields. If the curve is positive, the expectation is that the economy is likely to grow in the long term and interest rates are likely to grow with it. If the curve is negative or inverted, the opposite is true. That's why you’ll also hear about how the “inverted yield curve” is a bad sign for the economy.
Currently, the two yield rates are closer together than they usually are, suggesting that the market expects to see slower economic growth. What this means for rates is that it’s most likely not going to cost you much more to refinance your loan from a 2-year to a 5-year fixed rate. Chris explained that when the rates are low, it's best to go for a longer term. As a homeowner, if you can borrow at 3% for 30 years, that is better than 6% for a shorter-term mortgage. The lower rate and longer time give you more flexibility. For example, you could choose to pay off your mortgage in 15 or 20 years, creating huge savings when it comes to interest. Or, if rates change, you have plenty of time to refinance to adjust your position in the face of a rapidly changing market.
The Pandemic and a Global Economy
The pandemic and the corresponding government response drove dramatic changes in interest rates and treasury yields. The impact on other countries and markets throughout the world was a reminder of how interconnected our economies really are. Other events, such as the Russia-Ukraine crisis, have impacted our complex and globally distributed supply chains, causing further economic impacts. All of these events can influence consumer behavior and interest rates. Inflation, consumer sentiment, and world events will all be major driving forces in terms of how the Federal Reserve reacts throughout 2022 and 2023.
If you're interested in learning more about current financial topics, please tune in to the Dream Maker podcast. We would love to connect on social media @DreamFirstBank and online at DreamFirst.Bank!