Video Why The Fed Raising Interest Rates Matters
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The Real Reason Why The Fed Raised Interest Rates
Hi guys Lynette Zang chief market analyst here at ITM Trading a full-service physical precious metals brokerage house.
Today I want to just expand on the Fed rate increase because it’s important number one you can see from this graph which I pulled this morning on the two-year the ten year and the -year bonds they raised interest rates but apparently the market has disagreed okay so can are they seeing all of that okay all right so just just briefly on that because I’m going to tell you the real reason I show you actually the real reason why they raise the rates.
Janet Yellen and The Fed Raising Interest Rates
I’m going to start with this quote because we know that Wall Street is spinning it like they raise the rates because the economy is just robust and it’s just awesome this is actually a quote from Janet Yellen and this is what she really said we have seen the economy progress over the last several months in exactly the way we anticipated we have some confidence in the past the economy is on so if you listen to that quote know where did you say that the economy was robust in fact in their own words okay this is when they raise the race and this is the percentage change in GDP this is what they anticipate so this is just a little below % they anticipated going down to one percent and then as we’ve seen on this monetary velocity chart over and over again they’re not spending so she did not say that the economy is robust but that is the way Wall Street is spinning it and the reality is is that all of the central bankers have painted themselves into a corner because the real reason why they raise the interest rates is their job is to protect the banks in the financial sector so this big piece in here are the interest rates that the interest earnings and you can see that that’s been on a declining trend line and also you can see this big bike up here which we’re going to talk about in a few minutes and where it is right now and this little teeny spike from that interest rate raising but the real thing is what it’s doing these low interest rates are doing to the insurance companies whether it’s life insurance health insurance annuities etc they’re putting a huge strain there and particularly on the pension issue the retirement plan issue which is what the webinar the full-length webinar in let’s see april on april eleventh is going to be and there’s a link below to sign-up for it.
The April 11 webinar will blow your mind but this is the real reason they need the banks to make more money they need the insurance companies to make more money and they need the pension plan to make more money okay that’s the real reason now let me show you how this impacts us right because you all have probably all have money inside of the banking system and it is insured by the FDIC now the disk fund is the I’m sorry about that deposit insurance fund so that’s the money that they set aside in case of bank failures okie dokie well you can see that they had a little bit more than a penny to ensure deposits prior to the crash in and you can see that they became insolvent and solve it there were so many banks that fail that’s without showing you right there that they actually even said that if one more little bank had failed it would have become obvious that they had no more money in this insurance fund so what did they do they had to rebuild back so they had to rebuild the banks and they had to rebuild that fun okay I’m coming back to that in just a second.
The Fed Raising Interest Rates To Protect Banks
Right so here’s how what they use one of the tools that they use to recapitalize that dif fund as well as the banks and that was by giving the banks all of this money to hold in reserves and then for the very first time ever paying them to do it so understand that they shifted their tool from direct movement in the Fed Funds rate what they charge the banks for under overnight lending to modifying the amount that they pay the bank on those reserve it’s a new ones but it’s really really important that you get the difference between the two very very important so understand that the distance so that money that they set aside in case the bank bail okay is impacted by the amount of the premium that they charge on any reserve so now we’re hearing a boatload of reserves and what does that do that rebuild the disciplined but there’s still only one penny teeny weeny bit more than one penny to support the next bank failure as you can see what happened when those banks it was like when those banks actually failed we went into insolvency it’s going to be much worse this time because a lot of those banks were absorbed by the bigger banks and I’m going to read this remember that where you can see these better and you can cause me to do anything you want with them there’s a link below follow it and look at these slides.
Think about this there are trillion a hundred I’m sorry going too fast . four trillion in deposit inside of the banking system out of that . four trillion are insured so when there’s a bail-in all that excess poop goes away but there is billion in that disk fund to pay out you want to make sure that that little thing is closer can they see that now the interest that they pay is supposed to be costless right i mean the taxpayers will pay the cost but the bank shouldn’t pay the cost so it’s supposed to be free but here’s the problem the premiums that they have to charge are going up because they have to replenish this fund and that’s ruining the profits of the same so what’s the solution is is to make those reserves no longer part of the calculation on the premiums for that different now you saw how undervalues that is ok here’s the quandary you’ve got debt levels at all-time high you have the interest rates down so that hit that because basically this is annual interest right even though the dead explode is the interest didn’t because of that zero rate and they raise rates into it you’ve got margin the borrowing to buy stocks at all-time highs you have them going in opposite directions to the rest of the central banks that are lowering them and going below zero forty percent of the EU government on are below zero you have ah the confidence the institutions are the ones that that invest other people’s money they are all in they are all in these markets are not liquid they think socks are going to be higher I know they’re making those making faces at me and you have the stock market at the highest level of valuation other than during the Nasdaq crash so I gotta go I hope this look is too long for you is really really complicated and convoluted but your subscribe to us on YouTube they’re sitting there smiling at me subscribe to us on YouTube come to the next webinar on pension plans is really good follow us on twitter like us on Facebook I give us a call and take care go see these charts fun
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Chief Market Analyst, ITM Trading