Lower Interest Rates Likely to Curb Banks' Earnings
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What immediate market news sets the stage for this money briefing?
Here's your money briefing. I'm J.R. Whelan at The Wall Street Journal in New York. Keep an eye on your investments in banks. They could be going through some rough waters as the Federal Reserve, by many accounts, gets ready to lower interest rates. We'll chat with a journal banking reporter in a moment who will explain all this. For some money and market news, you should know. The Bureau of Safety and Environmental Enforcement says that oil and natural gas production had begun to recover on Monday following Hurricane Barry's track along the Louisiana coast and then inland. Oil production in the Gulf of Mexico was running at about 69 percent on Monday. Natural gas production at about 60 percent. Both are up significantly from Sunday when production was at more than half of those levels.
And both oil and natural gas futures traded down between 1 and 2 percent on Monday. And Facebook's upcoming cryptocurrency known as Libra has caught the eye of Treasury Secretary Steven Mnuchin. who says he has concerns that Libra could be misused by money launderers, and that any concerns about Libra, Bitcoin, or any other cryptocurrency are a national security issue. Cryptocurrency, by the way, enables people, among other things, to use and transfer money around the world at a cheaper cost than current options. Facebook says its cryptocurrency will be regulated by Switzerland's financial watchdog, and says Libra would never compete with national currencies or challenge central banks like the U.S.
Federal Reserve. Fed Chairman Jerome Powell and President Trump have both voiced criticism of Facebook's cryptocurrency, and they want more details on safety measures. And some members of Congress have said they want Facebook to stop work on Libra until their concerns are satisfied.
The happy days have been here again and again for the big banks, thanks to steadily rising interest rates. But with the Federal Reserve signaling a rate reduction is likely, banks could be in for a period of belt tightening. Let's talk with Wall Street Journal reporter Telus Demos. He's here in our studio to spell out some details for us.
How might Hurricane Barry's impact on Gulf production affect energy markets?
So, Telus, you know, one way we can measure the profitability of banks is by what they charge for loaning out money. versus what they pay out in interest. And what they make on loans is tied to those interest rates.
Banks' fate is pretty closely tied to what goes on with the Federal Reserve and the interest rate policy it sets. On the one hand, of course, banks are lending money out, and when the Federal Reserve raises rates, Banks can charge more for those loans, right? So most consumers know that when the Fed raises interest rates, they get a letter from their credit card lenders saying the prime rate has gone up by 25 basis points. Therefore, your rate has gone up by 25 basis points. On the other hand, the bank pays you money to deposit with them. that rate is a little bit less tied directly to what the Federal Reserve does. That rate is really set essentially by the market, by what consumers demand and what banks can get away with.
And for a long time, of course, consumers demanded virtually nothing because that was what banks were offering. The bank had very little incentive to offer more because the Federal Reserve was keeping rates pretty low. So consumers really didn't have much choice. Nowadays, consumers seem to have much more choice when it comes to where to deposit money. They can put it in a high-yield savings account. They can put it into a money market account. These are all sort of either cash or cash-like investments that pay more interest. So banks are facing the prospect of paying out a little bit more in interest. So when the Federal Reserve stops raising rates, a couple of things happen. One is that they are no longer passing along those rate increases to the people that are borrowing from them, right?
So you stop getting that letter from the credit card company saying your rates are going up. However, banks are a bit reluctant to lower the rate that they are paying you on your deposits lest you take your deposits across the street.
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