November 2022

INTEREST RATES, Friend or Foe By Trevor Hintzen, Director, Webster Bank

T here is no doubt – we are living in uncertain times. From international conflicts to supply chain issues, unemployment, and inflation, banks are attempting to conduct business while trying to predict the future state of the economy. One prevalent indicator of how the economy is faring is the interest rate. Interest rates mean different things to different individuals and professionals. To a banker in the homeowners asso ciation (HOA) and condominium industries, it affects the metrics which may increase or reduce a client’s incentive. To others, it affects loan rates (i.e., credit cards, auto loans, mortgages, etc.) Whatever the point of focus, all banks are affected by interest rates and their approach to compensat ing for it may vary. The interest rate is set by the Federal Reserve Board as a mechanism to stabilize the economy. In this article, I will focus on the Feds’ use of its “most effective tool in its tool box” and its approach to the Federal Funds Target range (FFT) and discuss these impacts on interest rates. Before diving in, I’d like to just provide a general “con nect the dots” sequence of events on why rates spiked in 2021 to the present day. As we saw with Covid-19, there were many public and private sector responses. Production

and manufacturing slowed because factories closed. In some parts of the world, cities endured mandatory lock downs. Ultimately trade was impacted, and unemployment soared. The immediate response (amongst others) of our government included lowering interest rates and injecting capital into the economy. Individuals and corporations received cash payments to subsidize income and revenue. Additionally, home prices soared by as much as 30%. Fast forward – the economy began reopening and consumer behavior (spending) normalized. These were early indica tions and concerns for inflation. This is where the Feds’ tool comes off the bench. In an effort to curtail borrowing and shrink the economy to con trol overall rising prices for goods and services, the Feds aggressively began a series of increases to FFT. This is a short-term borrowing cost for banks; it trickles down to other types of interest rates — mortgages, car loans and credit cards. Some of the interest rates that consumers depend on when borrowing money. Back to the world of property management and home owner/ condominium association banking – Interest rates play a vital role in decision making. This began with capitalizing on what was then a low interest rate envi CONT I NU E S ON PAGE 20

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