But has it?
Since January 2001, the Federal Open Market Committee has chopped the federal fund rate 13 times, pruning it from 6.5 percent to the new low of 1 percent last month. But from July 2001 to July 2003, the S&P 500 has fallen by 16 percent. NASDAQ has dropped by 13 percent. And the Dow Jones Industrial Average has slipped by 10 percent.
Most bank stocks, however, have fared better.
A few have even done much better.
Bank of America has seen its share price rise by 38 percent since then. FNB Bankshares has had its stock price climb by 45 percent over that period. Other results show Huntington Bancshares up by 14 percent; National City Corp. up 13 percent; Bank One up 8 percent; and Fifth Third Bancorp remained even.
And while the NASDAQ fell, the NASDAQ Bank Index grew by 23 percent in the past two years.
These numbers paint a rosy picture for lenders and make the fed fund rate cuts look like a prescription for what ails banks. But if one takes a longer gander into the looking glass at, say, the five-year return rate for all banks, it shows that stock prices of banks have generally mirrored the S&P, Dow Jones and NASDAQ.
But the cuts have helped bank stock prices recover faster than other industries. Their profits, however, haven’t risen accordingly, according to the Net Interest Margin.
Even though money does cost lenders less today, banks are also getting a smaller return on loans they make. And not all bank stocks have risen over the last two Julys. Comerica Inc. is down 15 percent over that period, for example.
But for those banks that have posted gains in stock prices, the rises haven’t come from commercial lending.
Rather, the consumer side of the business generally has fueled any surges. A lower fed fund rate means lower interest rates for consumers, too, and that can spark home sales and mortgage refinancing.
“Without the mortgage rate, we’d be in a recession,” said Eric Ericksen, an investment counselor. “The rate cuts have done little for commercial lending.”
Here is what the cuts have done for the housing market in the last two years. A 30-year fixed average refinancing rate was nearly 7 percent in 2001 and 5.2 percent earlier this month. The 15-year fixed average was around 5.8 percent two years ago and now sits at about 4.5 percent.
In addition, Fannie Mae revised its mortgage volume projection for 2003 twice this year.
First, the firm said the volume would be $2.15 trillion for the year and then it raised that estimate to $3.2 trillion last spring, a record amount.
Then in June, Fannie Mae again upped the estimate to $3.7 trillion for 2003, a new record amount. Two years ago, $2.02 trillion worth of loans were made.
Also, Fannie Mae expects 1.72 million housing starts this year, up from 1.6 million two years ago.
But despite all these glowing numbers, falling fed funds may not provide the positive effect for banks that some claim these do. Why? Simple.
“The reason why rates go down is because of a slowing economy. When we have a slowing economy, banks lend less money. When banks loan less money, they make less money,” said Ericksen, who also teaches finance at GVSU.
What falling interest rates really do best for banks is lift the value of the long-term bonds they hold in reserve, which increases the value of their assets, and lenders have a lot invested in those bonds.
So can the fed fund rate go lower than the 1 percent the FOMC set at the tail end of last month? It could.
But as Ericksen asked, would it do any good to, say, match the Japanese at a rate of .25? After all, he said, rates only fall when the supply of money exceeds its demand.
“One fallacy is falling interest rates are good for the stock market. They’re not,” he said, “because falling interest rates imply a slow economy and a slow economy means low corporate profits, which means low stock prices.”
Ericksen noted that Wall Street’s best performance years took place when interest rates rose. But as he also noted, interest rates usually rise for one of three reasons, and only one of the three is good for the market and the economy.
Rates go up when foreign investors stop buying American debt. And with the dollar rising in Europe now making that debt more expensive, interest rates could go up in the future while the economy remains slow. Not a good scenario. The other bad reason for higher interest rates is higher inflation. Not good, either, but not as awful as a rising dollar on foreign markets.
The sole good reason for rising interest rates? A strong commercial appetite for money.
“Rising interest rates due to rising demand due to corporations borrowing money to build plants and add equipment is good, because that is a demand thing. That is fine. That is good for the market,” said Ericksen.
“Maybe the key is that interest rates going down, or coming up, has to be seen in the context of why these are coming down, or why these are going up, before you can make a judgment on what is good or bad.”