This post was written by anonymous Minyanville contributor Peter.
With the Effective Fed Funds Rate running anywhere from 10-15 bps of late, what the Fed does with the Target Rate is completely meaningless in my book.
What will be far more important today is how the major banks react with their prime rates. Historically, banks move their prime rates basis point for basis point up or down with changes in the Fed Funds Target. But for every bank I know, they have far more loan assets indexed to prime than they do liabilities indexed to Fed Funds so, unless banks can lower deposit rates, further drops in the Target Fed Funds Rate actually hurt bank margins.
I believe the Fed is well aware of this issue (and contrary to many others, I believe this is a big reason behind the current "gap" between the Fed Effective and Target Rates.)
I know many small banks who, over the past year, have already "decoupled" their prime rates from the Target Fed Funds Rate. But it is the major banks whose prime rates drive the "market standard" Wall Street Journal-quoted Prime used for most loan pricing.
With rates near zero, banks unable to reprice deposits lower due to competitive pressure, and the need for margin expansion to help cover loan losses, my bet is the Big Guys decouple.
And in this environment, I strongly doubt anyone (ie the regulators) will say a word in opposition.
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Reader Comments (Page 1 of 1)
12-16-2008 @ 2:49PM
aCPA said...
Absolutely correct. Many banks are offering rates on CDs and savings accts at 3% to 4%. If prime falls to 3.25%, how is any profit made? Either deposit rates will come down (probably not likely since banks need deposits for capital base) or loan rates increase (also probably not very likely). This is why banks are loaning money, no incentive for profit.
12-16-2008 @ 3:50PM
Kent said...
Exactly ... lowering Fed rates add additional margins for bank loans. If I were the CFO of a bank, I'd keep interest rates on loans on the high side as much as the market allows. My bank on mortgages hasn't changed from a couple of years ago except ARM rates are little higher. Fixed rates are lower.
12-16-2008 @ 4:20PM
Iridium said...
6% for a 30 year mortage is extortion.
Forcing someone to pay $300k for a $150k loan should be criminal.
Am I supposed to cry for the bank because they have to pay out a little interest to people with a CD.
What they can't be happy with making over $150k for a loan. How about we set a 25% mortage tax. 25% of the principal is added to the loan which is then paid over time instead of interest. Even a 75% mortage tax, hell even a 90% mortage tax would be preferable to a 6% fixed rate loan paid over 30 years.
To every bank in the USA. GO SCREW YOURSELF, you reap what you sew.
12-16-2008 @ 4:54PM
Rudy said...
Deal with it Iridium. Many people of my generation paid off their 7.25 % 30 year loans. Of course we knew we were paying big bucks in the long run, but it was for a place to live and raise your family. Who cared if your home went up in value. You didn't buy the home to sell it soon or use it as an ATM.