Federal Reserve Chair Jerome Powell’s comments at the press conference following his announcement of a 25 basis-point interest rate cut sparked confusion on Wall Street, as everyone tried to decipher whether more cuts are coming.
But one economist says market participants have overlooked some good news: the Fed also lowered the interest it pays on excess reserves (IOER) — the amount the central bank pays to commercial banks to stow their funds at the Fed — to 2.10%.
“The market really missed this. The Fed is creating the conditions to pump money into the real economy. This is fundamentally a good thing,” said Joe Brusuelas, chief economist at RSM, in an interview with Yahoo Finance’s On the Move. The IOER rate cut is “forcing the banks to put that money to more productive use rather than sitting at reserve at the Fed, which we’ve been doing for over a decade. This is actually a really good development.”
While Brusuelas is optimistic this will spur lending, Mike Schumacher, global head of rate strategy at Wells Fargo Securities, is more skeptical. He points out that banks have three options for investing their money: park it at the Fed and earn that 2.10% return; buy conservative bonds like Treasuries; or make loans.
Will it really spur banks to lend?
“Making loans hasn’t been doing as well,” said Schumacher. “So it’s not at all clear to me that simply taking the interest rate on excess reserves down by 25 basis points is going to spur a ton of lending activity. I doubt it, frankly.”
Consumer credit — including credit card lending — rose 5% in May, according to the Fed. That’s faster growth than the 4.8% rate for 2018, but a slowdown from the prior several years.
At the same time, because of a tightening yield curve, banks are making less on loans. Last quarter, JPMorgan Chase, Bank of America, Citigroup and Wells Fargo all reported a decline in net interest margin, a key measure of the difference between interest collected on loans and interest paid on deposits.
“For a lot of banks, the easy route is simply to put money at the Fed,” said Schumacher. “We’ll pop money over at the Fed, we get this rate now, which is down 25, so it’s 2.10%, that’s really awfully good when you compare it to Treasury yields.” The yield on 10-year Treasuries fell below 2% today.
“The best part about financial earnings this quarter was the consumer-lending business and wealth management,” said Brusuelas. “There are plenty of places to put money. I just don't buy that.”
Brian Cheung contributed to this article.