Raising the US Interest Rate: Solutions and Obstacles

Since 1854, and up to the present day, the American economy has been buffeted by 33 recessions, whose durations lasted several months, while in that period there was a single depression, known as the Great Depression, in 1929. During those periods the interest rate was a primary tool when raised to combat inflation and rising prices, while at the same time it was a constraining tool for the American banking system because it tightens the processes of granting credit and lending — which are considered a principal tool for banks in performing their market functions. In the case of lowering the interest rate, it is a tool that has consequences on the path toward the emergence of inflation and rising prices, while bank credit and lending run rampant because the cost of borrowing is low, followed by growth in GDP as spending, consumption, and investment increase.

A few days ago (on Wednesday, 22-3-2023), the Federal Reserve – The Fed)) – the U.S. central bank – raised its key interest rates by 25 basis points (a quarter percentage point), bringing the benchmark rate to a range of 4.75% to 5%, the highest level since 2007, that is, before the global financial crisis in 2008. Note that this is the ninth time the U.S. Federal Reserve has raised rates since March 2022, with 6 meetings remaining during the year (2023), and the next meeting will be on May 3.

The average interest rate in the United States reached 5.42% for the period from 1971 until 2023, and it reached its highest-ever level at 20 % in March of 1980, while the record low was 0.25% in December 2008.

In a comment by an expert on Wednesday, 22-3-2023 after the 25-point rate increase, he said that "raising the interest rate today would be a mistake" because "the Federal Reserve has done enough to bring inflation back to target, and we do not know whether the threats to the banking system have ended"....... Other experts believe that the collapse of these banks was driven by interest-rate hikes by the Federal Reserve, which rose at an unprecedented pace since the early eighties, during that period of very high inflation the United States experienced.

Despite the Fed’s indication that the banking system is sound and resilient, the Federal Reserve hinted that it will continue to make decisions to tighten monetary policy by discouraging the granting of credit and borrowing to individuals and companies, and by encouraging deposit holders to save at banks — all that by moving the lending interest rate upward by percentage points sufficient to reduce the options of credit-seekers and increase the options of depositors — all that because the level of inflation is still high. When the U.S. Fed chair was asked about his plans to stop raising interest rates this year or to cut them, he answered, "I don’t think so," because inflation has not reached the level he seeks, which is 2%. It still stands at about 5.5–6% (last February), which is the highest inflation rate in forty years.

According to the Fed, recent developments are likely to tighten credit conditions for households and businesses and to affect economic activity, employment, and inflation. It is worth noting that the repercussions of raising the interest rate on individuals, businesses, and institutions will be a burden on individual indebtedness and government indebtedness, in addition to global indebtedness, which will result in increased debt-service obligations and installment payments, not to mention existing consumer loan debts whose charged interest rate will be adjusted by banks alongside debt restructuring.

In this regard, , most Gulf central banks have followed the U.S. Federal Reserve in raising the interest rate by a quarter percentage point because their currencies are largely pegged to the dollar.

It is worth noting, and on the subject of collapsed banks, that the losses of depositors in the Swiss bank Credit Suisse, which had operated for 167 years, have not been disclosed, and it was acquired for a pittance by UBS. Especially since the Swiss banking system enjoys absolute banking secrecy, and there are accounts for depositors identified by numbers and codes, and account openings at Swiss banks are numerous among members of ruling classes in developing countries, most of whom hold funds smuggled and looted from their countries..! In this context, media outlets on 21-2-2022 circulated that the Swiss bank "Credit Suisse" was at the center of media reports that addressed a massive amount of leaked data that shed light on hidden fortunes of many clients, among them political figures and former and current rulers, and figures involved in serious crimes. The (media organizations) indicated that they had reviewed the leaks, which included information on bank accounts belonging to several prominent Arab figures from Egypt, Jordan, Algeria, Oman, and others.

In addition to the leak of data on more than 18,000 bank accounts, including more than $100 billion, to the German newspaper Süddeutsche Zeitung, the data included personal, joint, and corporate accounts, some of which date back to the 1940s, while two-thirds of them were opened since 2000. Many of those accounts, according to media reports, remained open past the middle of the last decade, and some remain open to this day. However, the leaked data do not include information on the bank’s current operations. The bank has previously been accused of money laundering and has been subject to U.S. investigations regarding assisting clients in tax evasion..!

In this context also, the extent of the disclosure about the stability or decline in the value of foreign investments in the United States from other countries — including investments from oil-rich Arab countries — in light of the ongoing U.S. interest-rate increases and the crisis they caused for some U.S. banks, has not been revealed..!

One of the difficulties created by the interest-rate hiking cycle is harm to banking activity. What happened with the collapsed banks in the United States, and even Credit Suisse in Switzerland, in truth stems from repeatedly raising the interest rate — which tightened the noose on banks in performing their core functions, first among them granting credit and loans. Despite the Federal Reserve’s assurances and interventions and its effort to cover failing banks with generous loans, customer confidence remains unstable, especially as most of their deposits are not covered by the deposit-guarantee institution. We cite in this case the circumstances and factors of the collapse of the banking and financial system during the Great Depression in 1929, when the closure and suspension of thousands of banks at that time played a major role in causing the Great Depression. The first major banking crisis began in November 1930, with more than 800 banks having closed their doors by January 1931. By October 1931, more than 2,100 banks had been suspended. Then the economy as a whole experienced a decline in banking centers across the country as the number of closed banks exceeded nine thousand by 1933....

At the same time, it is currently unlikely that a depression similar to the Great Depression of 1929 will overwhelm the U.S. economy, since reaching such a state would require the economy to pass through recessionary periods for several months — a condition whose indicators have not yet been observed.

In this regard, it is advisable that we review the circumstances and factors of the market collapse in 1929 so that comparison and clarification can be made. The Wall Street crash of 1929 is usually cited as the beginning of the Great Depression.

●      It is written in the information archive about the Great Depression that it began on 24 October 1929, and it was the most destructive stock market collapse in the history of theUnited States, and the greater part of the stock market collapse can be attributed to overabundance and faulty expectations. In the years preceding 1929, high financial market prices created enormous sums of wealth for those who invested, which in turn encouraged borrowing to buy more shares. However, on 24 October (Black Thursday), stock prices began to fall, and the rush of investors to sell caused a sharp decline in prices. Then stock prices fell on 29 October (Black Tuesday) by a value of $14 billion in a single day, and by more than $30 billion during the week. The value evaporated during that week was ten times larger than the entire federal budget, and larger than everything the United States had spent on World War I. By 1930, stock values had fallen by 90%! (according to archival sources).

-       And because many banks invested their customers’ savings in the financialmarket, those banks were forced to close when the financial market collapsed. After the market collapse and the banks’ closures, people were afraid of losing more money. Fearing further economic challenges, individuals from all classes stopped buying and consuming. Thousands of individual investors who thought they would become rich by investing on margin lost everything they owned. The stock market collapse severely affected the American economy.

-       The closure and suspension of thousands of banks played a major role in the recession, as banks were forced to resort to fire sales (real estate) and to liquidate existing loans. In the race to liquidate assets...

-       The closing of banks and financial institutions led millions of Americans to withdraw a staggering number of deposits, estimated at about $6.8 billion dollars (equivalent to about $115 billion in today’s money “$1 in 1931 = $17 today). During that period, the Federal Deposit Insurance Corporation did not exist, which led to a loss of about $1.36 billion (or 20%) of the total value of deposits in banks, which are estimated at $6.8 billion. Those losses came from individuals’ daily savings, investments, and bank accounts. As a result, GDP fell from 700 in 1929 to an average of 600 in 1933, and it did not show any improvement during those four years for the first time in history.

-       The Federal Reserve Act was unable to address the banking crisis effectively,

-       Due to the absence of consumer confidence in the economic direction pursued by the federal government, panic began to spread rapidly across the country following the collapsestock exchangeWallStreet in 1929.

-       Rumors of market stabilization and the condition of banks began to spread, consumer confidence continued to fall, and the impact of panic took hold. The contagion spread like wildfire, prompting Americans to withdraw their deposits collectively, and from all parts of the country. This way of thinking continued from 1929 until 1933, causing the largest financial crisis the world has seen in the banking sector, and it destroyed efforts at economic recovery.. bank failures, caused by panic, contributed to turning a moderate recession into a major one.!

·      To be continued