In Banks We Trust

Beth Spadafore, Dan Fischer, and Chris Yatooma.

Navigating the current financial storm

By Paul Natinsky

Conventional wisdom has it that the best way to beat inflation is to raise interest rates. It makes sense—a rapidly growing economy creates increased demand for goods and services and heightened demand strains supply. Prices increase as a result.

“From an Economics 101 perspective, in the last 100 years, every time we’ve had an inflationary environment and interest rates have risen it’s supposed to slow down inflation because money becomes more expensive,” says Dan Fischer, president and chief executive officer at Citizens State Bank.

“Money becomes more expensive because there is less activity,” says Chris Yatooma of OCG Companies, a building restoration firm in Bloomfield Hills. “There are less loans, less construction, less purchasing of other companies, less acquisitions. Everything slows down a little bit, which would then slow down inflation,” he concludes. Inflation then decreases as demand slows down and goods and services become more abundant and available.

“It also puts pressure on companies to reduce jobs, which pushes the unemployment rate up. That is supposed to throw water on the flame from inflation,” says Fischer. “There is less demand because people aren’t working and have less disposable income.”

Unprecedented Times

But the age-old formula is not working. Despite frequent interest rate hikes, inflation continues its upward trend. Demand, particularly in the housing market, remains high.

“On the commercial side, at the beginning of the year most of my real estate investors started stockpiling their cash. If they had a property that was worth $6 million and they only had a loan for $2 million on it, they would put a line of credit on it without withdrawing but keeping the money in reserve, waiting for a fire sale,” said Beth Spadafore, business development officer at Community Choice Credit Union in Farmington.

“What we’re seeing now is something we’ve never seen in the history of this country, where we’ve had interest rates move up so quickly in the fed’s quest to quash and slow down inflation. Where we’ve had pretty much zero interest rates for 11 years—there probably hasn’t been enough time between rate hikes to let that effect take place,” said Fischer. “It’s kind of like we water boarded the consumer, the small businesses, because of this rapid rise in interest rates.”

Slow Down

Fischer, who has worked in the banking industry for 30 years, thinks it’s time to slow the interest rate hikes and develop realistic expectations.

Spadafore agrees. “I’ve never understood raising the rate to decrease inflation. To me it’s almost like a Catch-22, and so I think we need to stop raising the rates and give people a chance to catch their breath and get onto an even keel,” she says. “I don’t know if you’re ever going to see a commercial loan at 3 percent fixed again. When I was doing those loans a year or so ago, I was in awe because I’d never seen it.”

Like Fischer, Spadafore has worked in the banking industry for several decades, mostly in commercial lending for large banks. In contrast to super low rates in recent years, she remembers writing loans early in her career at 21 percent.

Fischer says trying to bring inflation down to 2 percent again might not be the answer. He says 4 or 5 percent is more realistic, paired with a break in interest rate hikes to give stakeholders a break to catch their breaths.

“Right now, there is so much uncertainty in the marketplace because we’ve had variables that we have never seen before,” says Fischer. “We’ve not seen (a pandemic like) COVID since the early 1900s. We haven’t seen bank failures in a long time, since 2008. And we have never seen interest rates rise this quickly.”

Sensible Moves

Spadafore was happy to see the federal government recently move to keep the prime interest rate at 8.25 percent, which she says is still high. The prime interest rate is the rate that commercial banks charge their most creditworthy customers based on the rate the federal government charges banks to borrow money overnight.

Spadafore says she has heard that the fed is going to raise rates again in third or fourth quarter, “and that really locks down a lot of big borrowers from borrowing.”

Part of the problem, according to Fischer, is that the steep interest rate increase on federal investment vehicles such as treasury notes would increase a cash shift to the feds and diminish deposits in banks, creating a shortage of money to loan customers.

“I don’t think there’s going to be a recession,” says Spadafore, “but I don’t think there is going to be a lot of buying. I think people are going to toe the line and hold tight to see what’s going to happen.”

Fischer thinks that if a recession does occur it could be a short one, with a recovery coming by the first quarter of 2024.

A recession is a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that a recession creates two consecutive quarters of negative gross domestic product growth.

“More reasonable interest rates over the longer term and a realistic expectation for inflation going forward are good ingredients for a stabilization of the economy,” said Fischer.

Whether there is a recession or not and whether interest rates and prices settle down or continue their current volatility, the conventional wisdom in this turbulent time is caution over panic.

Fischer says it will be important for people to maintain cash reserves during this period, but to move forward cautiously with plans…and trust strong relationships with banks, including local institutions.