What is better? Raising the rates or lowering them?
Well, Bob, it depends. In a time of economic distress, lowering rates (theoretically) spurs economic growth by lowering the cost of money. But it hurts savers. It also hurts lenders because it tends to squeeze margins. Doing a refi, I was able to snag a 30 year fixed rate mortgage at 3% a few years ago. If mortgage rates normalize and go back to 5 or 6% in the next few years, if the bank was able to call that and make me take the current rate, I'm sure they'd do it in a heart beat. But they can't. Sucks to be the bank in this case. It's the same principle as me not wanting to hold a 3% 30 year bond in an environment where 30 year bonds are trading at 5 or 6%. My 3% bond is worth substantially less than what I paid for it.
Who benefits from high rates and who benefits from low rates?
Kind of the same thing, only higher (or rising) rates tend to help lenders and savers, while potentially decreasing borrowing because the cost of money becomes higher. If they don't get their timing right, they could put a damper on economic growth before it really takes off.
What we're seeing now, in the short term, is that bank net interest margins are expanding - so their profits are accelerating. That's primarily why we've seen shares of banks rise so much over the past few months. At the same time, they've not increased rates paid to savers yet. IMO, if rates continue to rise, that will eventually happen though.
If the economy continues or accelerates its expansion, rising rates are a sign that the Fed is increasing rates to keep the economy from overheating. The Fed has targets for economic growth, inflation and employment. As these targets are met, rates tend to rise.
It's important to remember that the Fed
influences (short term) rates through the Fed Funds rate, but the Fed doesn't really
control (long term) interest rates. It's simply one of their monetary policy tools.
