Joseph Carleson After Hours attempts to bring a sound, reasonable voice to the discussion of what is happening in the current Financial storm. He starts by discussing interest rates, and what they are. Interest Rates, or the Federal Funds Rate, is the interest rate charged to Banks that are lent money from other banks at the end of the day in order to have the legally required amount of cash on hand to cover there net assets on the books. If banks have X amount of assets on hand, they must a percentage of X every night when they close. Joseph describes this as the baseline cost of capital, this is the cost of doing business for being a bank. The rate is determined by the Federal Reserve and the chairman of the Federal Reserve Jerome Powell. The changes in this rate have massive impacts on the economy. He dives into how the Federal Funds rate goes hand in hand with the valuation 2 year, 5 year, and 10 year treasury bonds trade at.
The valuation of treasuries is important because it is risk free, guaranteed money back investment backed by the US Government at the end of the of the maturity window. When interest rates rise, and the valuation of the treasury bonds go up, it devalues all other investments, since other investments have a certain amount of risk involved. So when the Federal Funds Rate, or "interest rates" go up, all other investments, such as stocks, real estate and other assets, goes down.
The rates going up has a forcing factor on the entire economy. Weaker businesses that were only staying afloat from money being lent out at extremely cheap rates are likely to go belly up. The supply of money is virtually decreasing, and only the companies with strong cash reserves and stable business models are capable of surviving times of higher interest rates. The longer interest rates remain high, the more the weak companies with poor business models and bad investments get weeded out and the stress test actually makes strong companies strong as they face less competition. The stress test has seen the tech space go through squeeze with Silicon Valley Bank Collapse and now Credit Suisse is showing some exposure to riskier asset classes and facing liquidity issues. Credit Suisse is a major financial institution in Europe and in the US, so its current troubles could lead to more trouble in the broader financial scenary.