Financial Idiot 017 - FED & ECB Interest Politics
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DISCLAIMER: I'm an idiot and this isn't financial advice! You can lose money when investing, and you should never invest money you don't own or you can't afford to lose. I'm not responsible for your decisions!
I should start with a small sorry for delaying this issue one day, but I'll admit, I'm not sorry. If I had written the Newsletter on Monday (I know, way too late), it would have been a bad one. I wasn't in the mood to write on Monday, which meant no newsletter on Tuesday morning. Anyway, it is just a day later, so what. :)
I usually wouldn't talk or write openly about politics. Still, if you're writing about money, there is no way around it at some point. So today, we'll look at the current monetary politics of the FED (Federal Reserve Bank) and ECB (European Central Bank).
I think I've already mentioned that the interest rates are currently raised by the FED and the ECB. Although everybody is talking and writing about interest rates, it can be challenging to find the current rate. At least I had to use the search engine of my choice for quite a few minutes to get a listing for the ECB (https://www.ecb.europa.eu/stats/policy\_and\_exchange\_rates/key\_ecb\_interest\_rates/html/index.en.html) and FED (https://www.federalreserve.gov/releases/h15/).
Since this Newsletter is focused on Austria, let's start with the FED :) (what a plot twist). The rate of the FED currently resides on 3,08% p.a. (I'm taking the "Federal funds (effective) "from the link above, but I'll have to say I'm wondering if this one is the correct one).
To make that value more tangible, if you borrow $ 1000 from the FED for one year, you will pay $ 30,08 in interest. The „target range“ (https://www.thebalancemoney.com/current-federal-reserve-interest-rates-4770718#:\~:text=In September%2C the Federal Reserve,to 3%25 to 3.25%25.) for this year. Nobody knows if they will keep increasing the rate afterwards, but it seems to be the case. Although I'm not informed about the housing market in the US, nor how banks "over there "hand out mortgages and loans. I'm not even sure if something like variable interest rates exists over there, but I guess it is the case.
Now, for a simple example: a Couple got a mortgage for their home at $ 500k in 2021. Back then (https://www.macrotrends.net/2015/fed-funds-rate-historical-chart), the interest rate was around zero per cent. Further, considering a 35-year repayment plan, the base repayment would be $ 1.190,48 per month. Again, that is without interest payments (remember zero per cent). If they started repayment in January 2021, they would have paid 24 months (considering the current year as "done", and I'm taking the interest change for simplicity to next year) or $ 28.571,52. A small dent on the large sum. From next year on, they will have to pay interest monthly too. Again, for simplicity, I'm leaving out the following years of repayment and focus only on 2024. With $ 471.428,48 remaining, they will also have to pay $ 14.520 per year in interest payments ($ 1.210 a month). Of course, that interest payment will decrease over time, but who could afford another $ 1,2k a month immediately? And that is not even considering a potential interest top-up (for example, one per cent) of the bank from which they took the mortgage. That yearly interest is more than they pay back on the mortgage yearly (at least if I didn't fuck up the calculation).
After that wall of numbers, let's do another round, but this time for the ECB. If I found the correct value (https://www.ecb.europa.eu/stats/policy\_and\_exchange\_rates/key\_ecb\_interest\_rates/html/index.en.html), we look at 0,75 % p.a. I think there are already talks to increase this rate even more, but for now, let's use it for 2024.
We got the same couple, and this time, they go 500k€ in the same timeframe as the above example. They repay the same base capital, but the interest is dramatically different. For 471.428,48€ remaining, the yearly interest would be 3535,71€ (294,64€ per month). Although that is also a significant increase in payments they have to pay, it is way less than the Americans have to repay. 300€ a month can be tight, but should be doable in contrast to $ 1.210 (even when ignoring USD to EUR).
With these interest changes, building or buying houses for people got a significant cost increase. Companies will only be able to take loans slowly and stop investing on their behalf.
But shouldn't that increase inflation, even more, you might ask? Well, for once, I can end the Newsletter with a cliffhanger to the next one. I know, I'm evil. :)