Sickly U.S. Economy Deemed Well Enough For Tiny Interest Rate Rise of 0.25%

Boy, was that a long buildup or what!

After several years of financial market commentators and kibitzers speculating on when the U.S. Central Bank, the Federal Reserve (commonly referred to as “the Fed”) would start raising short-term interest rates from almost zero, where they sat for a prolonged period after the near collapse of the financial system in 2008 caused by the reckless and irresponsible shenanigans of finance capitalists, the Board of Governors of the Bank finally did the deed on Wednesday, December 16, and started what is presumed to be the long-awaited up-cycle in interest rates. The rates set by the Fed have an immediate impact on interest rates for businesses and individuals (called “consumers” in market parlance) such as business loans, car loans, mortgages, and the already exorbitant rates charged on credit card debt and student loans. Banks immediately raised the rates they charged upon the Fed action- within minutes if not seconds. (But not what they pay depositors. [1])

The Fed certainly babied the financial markets over the rate rise. For months, Federal Reserve Chairwoman Janet Yellin and other Governors gently hinted that there would soon be a rise. When it finally came, it was all but officially announced in advance so there would be no surprise and no “shock” to financial markets. Even so, after U.S. stock indexes rose about 1.5% the day before the Big Day, evidently in approval, on the day itself they fell the same amount. This sort of unpredictable and irrational behavior is typical in the stock market. While rationales are always offered after the fact of stock market moves to provide “logical” explanations for the bizarre behavior, these aren't the actual reasons. Some of the reasons lie in the herd behavior of speculators and the momentum generated by computerized trading. But in order to sucker the rubes into buying stocks, market shills have to make the market appear comprehensible. On Friday, two days later, the Dow average fell 2.10%, the S & P 500 fell 1.78%, and the Nasdaq 1.59%. This is the time of year for a phenomenon called “year end tax selling.” If stocks continue to slide next year, the Fed will be blamed. Whenever stocks fall, finance whiners spew out various sophistries to blame the government for it. (But they don't give the government credit when stocks rise.)

Yellen, on announcing Wednesday's rate increase, referred to the seven year period of virtually zero short term interest rates as an “extraordinary” period, and the 2008 mess as “the worst financial crisis since the Great Depression.” Telling words. I wonder how bad the next inevitable crisis will be?

Crisis in capitalism are nothing new in America, by the way. They just are mostly ignored. In the 19^th century they came every decade or so, sometimes several within ten years.

Ideological fanatics have been claiming for years that the Fed was making a terrible mistake, even committing malfeasance, by not raising interest rates to “head off inflation.” The fact that inflation has averaged below 2% since 2008 has no effect on their near-hysterical rantings. No doubt they won't be mollified by a mere 25 basis point rise in short-term rates.

For those confused by talk of a rate rise of 25 basis points: A basis point is finance-speak for 1/100 of one percent. So 100 basis points is 1%, 150 basis points is 1½ %, and so on.

Now you know what a basis point is! See? The esoteric jargon of the high priests of finance isn't so impenetrable after all!

1] Banks loan out money at around 5% for mortgages, various rates for car loans, and charge businesses varying rates depending on “creditworthiness” and other factors. On credit card debt they rake in 13-20%.What banks PAY for the money they use to loan out if it's your money in a savings account is on average 0.06%. That's the average rate of bank savings deposit accounts nationally in the U.S., as calculated by the Federal Deposit Insurance Corporation as of December 14, 2015. [I found some online sites with grossly incorrect average savings deposit rates.]

So if you had $1,000 in a savings account for a year, you would be paid the princely sum of 60 cents for the entire year. On the other hand, if you carried a $1,000 balance on a credit card at 20% interest, you'd pay the bank $200 in interest for the year. That's fair, right? I mean, they're loaning you OTHER PEOPLE”S MONEY, after all.

 
If you wanted to lock up your money for the next five years in a bank so-called Certificate of Deposit (CD), on average you'll be paid at the princely rate of 0.79% a year for the next five years. Checking account deposits not only don't pay interest, the depositors have to pay fees on top of that. Plus banks have all kinds of “gotcha” fees. This when their actual costs are lower than ever, thanks to computer automation. (They typically charge $30 if a check you deposit bounces- that actually costs them pennies to process.)

Now compare the measly 0.06% interest they pay you vs. the 13-20% they charge on credit card debt, and the multiplier is over 200 and 300 TIMES. Or an increase of over 30,000%. Not a bad business to be in.

[For comparison, in the UK, the average interest paid on savings in 2014 was 1.48%.]