0:03

Fast fact, if you

0:03

think that interest rates are a

0:07

new concept, think again. There

0:07

are records of interest rates

0:11

dating back over 4000 years to

0:11

ancient Babylon, when the code

0:16

of Hammurabi regulated interest

0:16

rates, and set limits on how

0:20

much could be charged. I'm Drew

0:20

Thomas, and you're listening to

0:24

Bank Chats. All right, so welcome, welcome.

0:46

Glad to have you with us once

0:48

again. This is of course,

0:48

AmeriServ Presents: Bank Chats,

0:51

where we delve into the

0:51

intricate world of finance one

0:54

topic at a time. And that makes

0:54

us sound way more highbrow than

0:57

we really are. Today, we're

0:57

going to be talking about

1:01

something quite interesting. And

1:01

that is the topic of interest

1:03

rates. And so you picture this,

1:03

you're sitting there, you're

1:07

sipping your morning coffee,

1:07

scrolling through your bank app,

1:09

and you see the interest rate on

1:09

your savings account. And it

1:12

seems kind of mundane, right?

1:12

It's just what it is. And it's

1:16

kind of this boring, arbitrary

1:16

number. And you don't realize

1:19

how much that number has far

1:19

reaching consequences, not only

1:22

necessarily for you on your

1:22

personal accounts, but also

1:25

farther reaching consequences

1:25

than that. So, you've got

1:28

personal impacts, borrowing

1:28

power, things like lending and

1:32

savings accounts, national and

1:32

global impacts, possibly. So,

1:36

we're going to talk about

1:36

interest rates, we are going to

1:39

try to understand all of this

1:39

and in order to help us do that

1:42

is our guest on the podcast today. And I don't want to confuse anybody because regular

1:44

listeners know that our Producer

1:47

Jeff Matevish, is named Jeff.

1:47

But our guest is also named

1:50

Jeff, his name is Jeff Sopko.

1:50

He's the president and CEO of

1:53

AmeriServ Financial. Hi, Jeff,

1:53

how are you?

1:55

Great. I'm glad to

1:55

be here. Absolutely. Drew and

1:58

Jeff. Thank you.

1:59

Yeah, absolutely. I'm

1:59

really glad to have you, glad

2:01

that you could make the time to

2:01

do this, because this is one of

2:03

those topics that I think

2:03

affects people on a daily basis,

2:06

and yet is one of those things

2:06

that a lot of people don't

2:08

always understand what is going

2:08

on. Right? So, you see stuff in

2:12

the news, you hear about

2:12

interest rates and inflation and

2:15

things and that may or may not

2:15

impact you, right? So, let's

2:19

start with the basic stuff,

2:19

right. We're going to talk a

2:21

little bit about the stuff that

2:21

impacts you as an individual.

2:24

So, I think most people who look

2:24

at the interest rates, you look

2:26

at things like savings accounts,

2:26

investments, things like that,

2:28

how does that kind of interest

2:28

impact most people?

2:31

Yeah, maybe let me

2:31

start by saying, you know,

2:33

interest rates impact

2:33

individuals and businesses in

2:36

different ways. And maybe a good

2:36

way to help understand that is

2:41

the high level look at the

2:41

business of banking. Okay, well,

2:45

what do banks do? We take in

2:45

deposits, we take in money from

2:49

consumers and businesses, and

2:49

then we turn around and what do

2:52

we do with that money, we

2:52

typically then look to lend it

2:56

out both businesses and

2:56

consumers. Sure. Well, how

2:59

interest rates impacted is, we

2:59

pay to our depositors who bring

3:04

that money in, we pay them a

3:04

rate of interest for allowing us

3:09

to use their money. Fair enough.

3:09

Fair enough. And there are

3:13

various types of deposit

3:13

accounts. There's savings

3:16

accounts, money market accounts,

3:16

certificates of deposit, and

3:20

there are different rates for

3:20

those products, but it's

3:23

basically the bank paying the

3:23

customer or the ability to house

3:28

their funds. Right. So, that's

3:28

interest rates, we pay to

3:32

customers. Okay. So, then

3:32

there's also interest rates that

3:36

consumers and businesses pay to

3:36

the bank. Okay. So, what I mean

3:40

there is, you will take those

3:40

deposits will lend them out for

3:44

mortgage loans, home equity

3:44

loans, commercial loans, and we

3:48

will charge the borrower an

3:48

interest rate for that money.

3:52

Okay. Okay. So, they're both

3:52

interest rates, but as I'm

3:56

trying to explain, there's

3:56

depending on what side of the

3:59

equation you're on, sure, you

3:59

could be receiving an interest

4:02

payment based on an interest

4:02

rate from the bank, if you're a

4:05

depositor, versus paying the

4:05

bank an interest rate, if you're

4:09

borrowing money, as yeah, sure,

4:09

equity loan, mortgage loan,

4:13

whatever type of loan. So,

4:13

they're both called interest

4:16

rates, but you could see,

4:16

depending on where you're at,

4:19

what side you're on, you can

4:19

either be receiving or paying

4:22

Right. So, we, and

4:22

we've talked to in other

4:22

interest. episodes of the show where, you

4:25

know, I think Jeff and I talked

4:28

about one in a 2 Cents episode,

4:28

sort of the idea of not putting

4:31

your, your money in under the

4:31

mattress at home and all that

4:34

kind of stuff, like putting your

4:34

money in a bank is really the

4:37

safest place for it to be. But

4:37

as a sort of reward of doing

4:40

that the bank will usually pay

4:40

you for the privilege of having

4:43

it there and then being able to

4:43

then turn around and lend it

4:46

out. Now, you said you can turn

4:46

around and lend out that money,

4:49

but you can't lend every dollar

4:49

you have, right. There's a

4:52

certain amount that you're

4:52

allowed to lend right?

4:55

Theoretically, you

4:55

could lend 100% of our deposits

4:59

out okay. You know, take, for

4:59

every $100, we take in we $100

5:02

we lend out. It gets more

5:02

difficult to do that the closer

5:07

you get to 100%. But we very

5:07

much want to lend those deposits

5:13

back into the economy, because

5:13

that helps a local economy. When

5:18

people are borrowing money, when

5:18

businesses are borrowing money,

5:21

that means they're spending, and

5:21

spending is an important tool in

5:25

our economy. So, yeah, it gets,

5:25

gets more difficult when you get

5:29

to, we'll call 100%

5:29

loan-to-deposit ratio. But as a

5:33

community bank AmeriServ, we

5:33

typically have been running with

5:36

a loan-to-deposit ratio of 85%

5:36

to 90%. So, that means out of

5:41

every $100 we take in in

5:41

deposits, we're lending $90 back

5:45

out, yeah, it's a good ratio.

5:45

That means we're supporting our

5:48

economies, we're helping people

5:48

buy their home, we're helping a

5:52

business expand, which is

5:52

important to the economic

5:56

viability of the area you live

5:56

in. Yeah, absolutely, we would

6:00

rather absolutely rather lend

6:00

more out than not, because if we

6:05

don't lend it out, we have to

6:05

turn around and buy investment

6:08

securities and such, which

6:08

typically yield a lower interest

6:12

rate than a loan. So, back to

6:12

this interest rate discussion,

6:15

right, because really the

6:15

profitability of the bank model

6:18

is the difference we make

6:18

between what we charge a

6:21

customer on a loan, versus what

6:21

we pay on a deposit at spread,

6:25

is really what banks utilize to

6:25

open branches, pay our people

6:30

invest in technology, whatever

6:30

we need to do.

6:32

Sure, and I think

6:32

that's a, that's an important

6:34

distinction that I think a lot

6:34

of people have, you know, people

6:37

watch too many movies, I think

6:37

sometimes and they imagine that

6:40

the bank is just holding all

6:40

this money, and there's just,

6:43

just money everywhere. And

6:43

there's just, it's not like

6:47

that. Our goal really, or a

6:47

bank's goal, I should say, is to

6:50

do exactly, as you said, to

6:50

reinvest in our communities, to

6:53

put that money back out there

6:53

for people to use in ways that

6:56

are productive. And then to just

6:56

take what we need in the middle

7:00

there to keep things running,

7:00

and keep the lights on, and keep

7:03

the people employed, and so

7:03

forth. So, yeah, that's a good

7:05

Yeah, I mean, we

7:05

don't have all this money just

7:05

point. So. housed in our vault, waiting,

7:08

yeah. The reality is, you know,

7:13

the money as you said, you use

7:13

productively, we want to lend it

7:16

out, we want to help customers

7:16

reach their, you know, their

7:19

financial goals. And that's

7:19

really so important to a

7:22

community bank.

7:23

So, when you're looking

7:23

at a place or at a bank to place

7:26

your money, and you know, we see

7:26

interest rates all the time,

7:29

especially in the last few

7:29

years, interest rates on savings

7:32

accounts and CDs have been

7:32

higher than they had been in the

7:35

past, probably 10 or 15 years

7:35

before that. How do you make a

7:38

comparison? There's an interest

7:38

rate, right? And then there's

7:41

also something called an APY?

7:41

So, what is the difference

7:44

between an interest rate and an

7:44

APY and why should I care?

7:48

Yeah, I mean, it's

7:48

a subtle difference, usually,

7:50

it's not dramatic. But

7:50

basically, it gets into an

7:53

interest rate and an annual

7:53

percentage yield, an APY. Okay,

7:57

so what happens, if you have a

7:57

deposit account and you're

7:59

letting the interest that we pay

7:59

you go into the account and

8:03

compound, that will cause the

8:03

APY to be a bit higher? Okay.

8:09

So, generally, if you're, if

8:09

you're paying interest on the

8:12

account only once a year, the

8:12

APY and the interest rate are

8:16

going to be basically the same.

8:16

But if you're compounding it,

8:19

putting it in, its growing,

8:19

causes a little higher APY,

8:22

because in effect, you're

8:22

earning on the interest that

8:25

went into your account as well.

8:25

Okay, so I mean, not, not, not a

8:28

large difference, but that's the

8:28

subtle difference between an APY

8:31

and an interest rate.

8:32

But I think that brings

8:32

up a good point, let's talk just

8:34

a minute about the difference

8:34

between a simple interest and a

8:37

compound interest. So, when you

8:37

hear those terms, can you define

8:41

those maybe in a simple example?

8:43

Yeah, I guess, so,

8:43

let's say you have a certificate

8:46

of deposit, okay. And it has an

8:46

interest rate of 4%. Okay. But

8:52

that interest is paid

8:52

semi-annually, let's say twice a

8:56

year. So, what that means is, if

8:56

you had a 10, try to keep the

9:01

math simple. If you have a

9:01

$1,000 CD, 4% interest rate,

9:06

that means over the course of

9:06

the year, you would earn $40 on

9:10

that CD, on that CD, right. If

9:10

the interest is paid

9:14

semi-annually, what happens is,

9:14

you would get half of that $40,

9:19

$20. After six months, you put

9:19

it into your certificate

9:24

balance, okay, that has now

9:24

grown from $1,000 to $1,020. And

9:31

then you'll catch it, you'll

9:31

earn your 4% for the next $1020.

9:35

That's the idea of compounding

9:35

interest. And it's really

9:39

helping you make your money work

9:39

more effectively. In other

9:42

words, if you don't need to take

9:42

that money out for whatever

9:46

reason, spending, buy something.

9:46

If you could leave it in the

9:50

account and let it build it will

9:50

compound and build rapidly over

9:55

Yeah, there's a,

9:55

there's a very over simplified

9:55

time. example that I've heard over the

9:57

years where somebody says, would

10:01

you rather have a million

10:01

dollars today, or would you

10:04

rather somebody give you a penny

10:04

a day and double it for the next

10:08

30 days? And if you do the math,

10:08

it's crazy. You end up with like

10:11

something along the lines of

10:11

$3.7 million, or something by

10:15

the end of 30 days. But it also

10:15

talks about the importance of

10:18

keeping your investments

10:18

consistent, right? Because

10:21

really, what's happening is, you

10:21

know, by the end of day 16,

10:24

you're still at like, $3. But at

10:24

day 28, you're at $1 million, by

10:28

day 29, you're at $2 million, at

10:28

day thirty, you know. So, it's

10:32

amazing how, by the end, and I

10:32

think they use that example

10:35

sometimes too when they talk

10:35

about retirement investments and

10:38

401k, it's this idea of keeping

10:38

your money in there and letting

10:42

it work for you, as you say, and

10:42

compound and like I said, it's

10:46

an overly simplistic example.

10:46

But it is an interesting point.

10:49

Your point is spot

10:49

on, because a lot of times

10:52

people just don't really realize

10:52

the power of compounding. You

10:55

know, you sit there and think

10:55

well, oh, I earned $100 on my

10:59

CD, you know, it's a $10,000 CD,

10:59

does it really make a

11:02

difference? Well, you know what,

11:02

it does, sure. And if that's,

11:05

you keep that CD in place for

11:05

three years, five years, it just

11:08

continues to build, you earn on

11:08

a higher balance. And as you

11:11

said, the value of compounding

11:11

can be very important to you.

11:15

You know, as you go through life

11:15

and try to build your savings or

11:18

investment account. Yeah.

11:19

So, let's shift gears a

11:19

little bit. Let's talk about the

11:21

lending side, of it. So, there's

11:21

all kinds of different loans out

11:24

there for anywhere from a

11:24

personal loan, which is like a

11:27

personal unsecured loan, all the

11:27

way up to something most likely

11:31

the largest loan most people

11:31

will take out is either a

11:33

student loan or a house or

11:33

mortgage. So, how are interest

11:37

rates calculated on something

11:37

like a personal loan? Is it the

11:40

same thing where you just...

11:41

Yeah, really same

11:41

concept, it's going to be what

11:44

you're paying for the use of

11:44

that money. So, back to again,

11:48

if you take out $1,000 loan, and

11:48

it has a 7% interest rate, that

11:53

means you are going to pay the

11:53

bank $70 a year for the right

11:58

you don't have that money and

11:58

use it. So, it's similar

12:01

concept. It really isn't

12:01

compounding going on...

12:04

I was gonna say so

12:04

that, that doesn't really play

12:06

into a loan, right? Yeah.

12:08

And but if you want

12:08

to, what I'll say, reduce,

12:12

ultimately, the amount of

12:12

interest you pay on a loan, if

12:17

you could pay it off sooner,

12:17

that would allow you to do that.

12:22

So, you know, back to my simple

12:22

example, $1,000 7% that's $70,

12:27

in interest, first year. As you

12:27

pay that loan down and make

12:32

principal payments, that $1,000

12:32

goes down to $800 7% of $800 is

12:38

$56, not 70. So, sure, on the

12:38

loan side, you can reduce your

12:43

interest cost if you pay the

12:43

loan down more rapidly.

12:48

Yeah, I've, I've

12:48

actually heard, somebody told me

12:50

one time that if you can afford

12:50

to, on a mortgage for example,

12:55

if you can afford to make one

12:55

principal only payment a year,

12:59

how much it actually in the long

12:59

run will reduce the amount of

13:02

time it takes you to pay off

13:02

your home, right, because, we'll

13:05

talk about home interest here in

13:05

just a little bit as we talk

13:07

about like the national debt,

13:07

but the amount of interest on

13:10

your home, because your home

13:10

loan is so large normally,

13:13

you're talking usually several

13:13

$100,000 possibly, making that

13:17

one principal only payment

13:17

really reduces your interest

13:19

cost. Yeah. So, whether it's a

13:19

personal loan, or a car loan, or

13:24

a home loan, essentially interest rate is calculated the same, you get an interest rate

13:26

that is told to you by your

13:29

bank, you, and then you can

13:29

calculate out exactly how much.

13:31

And obviously the

13:31

other, as you mentioned, the

13:34

other item that's important,

13:34

when on the loan side, is the

13:37

term of the loan, how long will

13:37

the loan be outstanding? Okay,

13:41

okay, a mortgage loan, typical

13:41

30 year maturity, you're paying

13:45

a lot more interest because you

13:45

have use of the money a lot

13:49

longer, you take out an auto

13:49

loan for five years, the

13:52

interest component isn't as

13:52

significant as it would be to a

13:56

residential mortgage where

13:56

you're paying on it so much

14:00

longer. So, not only does the

14:00

interest rate itself impact the

14:04

payment, but also the length or

14:04

time you're going to amortize

14:07

the loan over.

14:09

And that makes sense.

14:09

And I mean, car prices. I mean,

14:12

You could almost

14:12

buy a house for a car price.

14:12

we can...

14:15

I mean, we can get into

14:15

that whole conversation

14:17

sometime. But yeah, the cost of

14:17

some vehicles now are easily

14:20

more than the price my parents

14:20

probably paid for their house,

14:23

which is crazy. But you're

14:23

paying that off in a, in a five

14:26

year timespan usually or

14:26

something like that, and you

14:29

maybe maybe six, as opposed to a

14:29

30 year or 15 year mortgage,

14:32

something along those lines. So,

14:32

that also, you know, plays into

14:35

I think somewhat on interest

14:35

rates when it comes to things

14:38

like revolving lines of credit,

14:38

or credit cards, right? Normally

14:41

those interest rates are

14:41

significantly higher than they

14:44

would be on a personal loan. Why

14:44

would that be?

14:46

Well, the main

14:46

reason credit card interest

14:49

rates are so much higher is

14:49

because that's what's considered

14:52

an unsecured debt. Okay, there's

14:52

no collateral associated with

14:57

it. Whereas if you're buying an

14:57

automobile, for example, and

15:01

taking out a loan on that,

15:01

ultimately the bank is going to

15:05

have the vehicle as collateral

15:05

that we could go get if you

15:10

elect not to pay the loan back.

15:10

Credit card interest rates are

15:14

so much higher because there's

15:14

no collateral involved. Okay, if

15:19

you have a $5,000 credit card,

15:19

and you decide you're not going

15:23

to pay it back, the the bank

15:23

doesn't have a piece of

15:26

collateral securing that. So,

15:26

again, safer loans that have

15:31

collateral tend to have lower

15:31

interest rates than unsecured

15:35

loans. Credit cards are the most

15:35

expensive interest rate you

15:39

could have. Yeah, on a loan product.

15:41

Yeah. But that also

15:41

brings up a good point about the

15:44

sort of, how we calculate

15:44

interest rates, how interest

15:46

rates are decided upon, right.

15:46

So, when it comes to a basic

15:50

personal loan, there's more to

15:50

it, and we'll talk about the Fed

15:54

and things like that here in a

15:54

minute. But essentially, what,

15:57

what the bank is normally doing,

15:57

is assessing your individual

15:59

risk and then assigning an

15:59

interest rate to you, right? So,

16:03

you're looking at somebody's

16:03

likelihood to pay it back, the

16:06

collateral you have, and how

16:06

much risk is involved for the

16:09

bank, when you calculate an

16:09

interest rate is that fair?

16:11

That's correct. And

16:11

it's really based upon the

16:12

Yeah, yeah. And you

16:12

make a very good point, if

16:14

product, because one of the

16:14

things really a bank should not

16:18

do is charge different rates for

16:18

the same product, to different

16:19

you're going to a place, any

16:19

kind of institution, where they

16:22

individuals. Yeah, that's

16:22

important. Fair Lending is very

16:26

are saying to you, well, we're

16:26

arbitrarily choosing an interest

16:26

important in our world. So, what

16:26

you'll see is the bank will

16:30

establish for automobile loans

16:30

that have a five-year term,

16:33

here's an interest rate. You

16:33

know, residential mortgage loans

16:35

rate for you. You shouldn't be

16:35

dealing with that kind of an

16:37

that have a 15 year term, here's

16:37

an interest rate. There could be

16:41

some modification based upon

16:41

the, I'll say, the financial

16:45

health or quality of the

16:45

borrower, but it's usually not,

16:49

pretty narrow. It's pretty

16:49

narrow band.

16:56

institution.

16:57

Right. But yeah,

16:57

that should raise some red flags

17:06

pretty quick. Yeah, absolutely.

17:08

So, let's talk a little

17:08

bit about how interest rates are

17:10

decided upon. And to sort of get

17:10

into that, let's talk about who

17:13

the Fed is, because we see that

17:13

on the news, you hear about the

17:17

Fed making this decision, the

17:17

Fed making that, who are these

17:20

people and why? Why are they

17:20

messing with my interest rate?

17:23

Absolutely. No, no

17:23

the Federal Reserve System,

17:24

Yeah, absolutely.

17:24

When we talk about interest

17:26

Federal Reserve Bank, I could

17:26

expand on that, really is the

17:30

central bank of the United

17:30

States. Okay. And they serve a

17:34

critically important role in our

17:34

economy, okay. And the Federal

17:38

Reserve System, here's a couple

17:38

of their, what I'll say their

17:43

key goals. I mean, this is what

17:43

they do. Okay, they conduct the

17:47

nation's monetary policy to

17:47

promote maximum employment,

17:50

rates, I don't know that a lot

17:50

of people always equate an

17:51

stable prices, that's the

17:51

inflation element we'll talk

17:54

about, and moderate long term

17:54

interest rates for our economy.

17:58

So, they play a critical role in

17:58

establishing interest rates.

18:03

They also help promote the

18:03

stability of the financial

18:06

system. So, they oversee the

18:06

banking system and examine and,

18:10

and ensure that banks are

18:10

routinely examined to ensure

18:14

they're operating properly. I

18:14

mean, we saw back in 2023, in

18:18

March you know, there were a

18:18

couple of larger bank failures,

18:22

Silicon Valley Bank, Signature

18:22

Bank, and you know, that's an

18:23

interest rate with job

18:23

performance or the job market.

18:26

example of how the Fed has to

18:26

ensure oversight of financial

18:30

institutions. Okay. And, you

18:30

know, that's part of this whole

18:34

safety and soundness, ensure the

18:34

banking system is operating

18:38

safely and soundly. That's

18:38

another part in their role.

18:42

Yeah. So, they have multiple,

18:42

they have multiple objectives.

18:46

We're kind of more focusing

18:46

today on objective one, which is

18:50

promote maximum employment,

18:50

stable interest rates, moderate

18:54

long term interest rates, that's

18:54

really what our, our focus is today.

18:54

So, how does that work?

19:07

You know, let me

19:07

step back. And before I answer

19:10

that, so there's this Federal

19:10

Reserve Bank, so let's look at

19:14

specifically then the

19:14

individuals involved. Okay.

19:18

Okay, that make these decisions.

19:18

Okay. There's something called

19:22

the Board of Governors of the

19:22

Federal Reserve System. There

19:26

are seven individuals that are

19:26

in that role. Okay. They're

19:30

appointed by the President, and

19:30

they have to be approved by the

19:33

Senate. Okay, so these seven

19:33

individuals make up what's

19:37

called the Board of Governors of

19:37

the Federal Reserve System. And

19:40

that group is based in

19:40

Washington DC, not surprisingly.

19:43

There are also then across the

19:43

United States 12 Federal Reserve

19:48

districts. So, in effect, we

19:48

have 12 Federal Reserve banks

19:53

across the country, that this

19:53

group of seven works with and

19:57

overseas okay. Like AmeriServ

19:57

Financial where we're located

20:01

headquarter in Johnstown. We're

20:01

in what's called the third

20:03

Federal Reserve District, which

20:03

is the Federal Reserve Bank of

20:07

Philadelphia. Okay. So, those

20:07

seven individuals, along with

20:13

five presidents from these

20:13

districts, okay, meet eight

20:18

times a year, they're part of

20:18

what's called the Federal Open

20:21

Market Committee. And their goal

20:21

is to establish short-term

20:26

interest rates. Okay. So, it's

20:26

really that group of individuals

20:30

making that decision. And, as

20:30

you said, when you hear on the

20:33

news, like, you'll probably hear

20:33

a headline of the Federal

20:36

Reserve met and elected to keep

20:36

rates the same, increase

20:40

interest rates, they're

20:40

referring to that meeting of the

20:44

Federal Open Market Committee,

20:44

which happens eight times a

20:47

year.

20:48

So essentially, it's

20:48

not exclusively a government

20:51

decision, right? This is really

20:51

more than one person, first of

20:55

all, let's put it that way. It's

20:55

not one person making all these

20:57

decisions. And then it's not

20:57

necessarily the government

21:00

deciding this either, per se.

21:00

And when you say short-term

21:03

interest rates, how short-term?

21:05

I mean, that's

21:05

really like overnight to three

21:07

months. Okay, short-term on the

21:07

money. Yeah. And back to your

21:10

point, one of the Federal

21:10

Reserve's job is really to be

21:13

a-political, you know, they're

21:13

appointed, they serve longer

21:17

terms. Each governor has a term

21:17

up to 14 years. So, the idea

21:22

there is you, you maintain

21:22

consistency, and you're not

21:25

shuffling people in and out of

21:25

this very important job every

21:29

year or two, okay. Right, or every four.

21:32

Yeah, the only, the only Federal

21:32

Reserve Board of Governors

21:38

positions that can change every

21:38

four years, is the Chairman of

21:42

the committee and the Vice

21:42

Chair, okay? Those positions

21:46

aren't locked for 14, but they

21:46

could change every four. But the

21:50

idea there is you want to have

21:50

stability within this very

21:53

important body so that they, you

21:53

know, don't become hold on to

21:57

the, you know, the wills of the

21:57

party that's in power.

22:00

Sure, yeah, that

22:00

absolutely makes sense. So,

22:03

what, what factors do they

22:03

consider whenever they're

22:07

setting an interest rate?

22:08

Sure, they

22:08

absolutely look at, the key

22:10

factors they look at is, how is

22:10

the economy performing, you

22:14

might hear the term GDP, gross

22:14

domestic product. If that's

22:18

growing, or if that's a positive

22:18

number that signifies the

22:22

economy's growing. Okay. Another

22:22

important metric that is very

22:26

important to the Federal Reserve

22:26

Board of Governors is the

22:29

inflation rate. Okay. Because,

22:29

to have a stable, successful

22:35

economy over the long haul, you

22:35

have to ensure inflation is

22:40

controlled. Economies that have

22:40

runaway inflation, do not do

22:45

well. Yeah. Okay. So, really

22:45

there, that's back to their what

22:48

I said earlier, their key

22:48

objectives are to promote

22:51

maximum employment, but also

22:51

ensure stable prices. So, it's,

22:57

it's a balancing act, too.

22:59

So let's, let's

22:59

elaborate, just a just a touch

23:02

on inflation. So, essentially,

23:02

inflation is how much your

23:04

dollar buys you? Is that, is

23:04

that a fair assessment? So. So

23:08

essentially, if a candy bar cost

23:08

me $1 today, and inflation goes

23:12

up, than it might cost me $1.10,

23:12

tomorrow, inflation goes down,

23:15

and maybe cost me $0.90 the next

23:15

day. So, how do they calculate

23:19

inflation? How do they look at that?

23:20

Basically, what

23:20

they do when they calculate

23:21

So, is it but you're right. It's

23:21

kind of a balancing act, because

23:23

inflation is, the Fed is

23:23

targeted a rate of 2%. So, in

23:27

other words, they are trying to

23:27

keep the annual rate of

23:31

inflation to 2% or less, okay?

23:31

Because there's going to be

23:35

normal price pressures on

23:35

products, on wages, people are

23:39

paid and such. But they have

23:39

found out longer term, if you

23:43

could keep that inflation rate

23:43

around 2%, that's very stable,

23:47

very predictable. So, that when

23:47

you're thinking about buying

23:51

your house, or buying furniture

23:51

for your house, or going to the

23:56

grocery store, you want to know

23:56

that a year from now, I'm not

24:00

going to be paying 10% more for

24:00

that product than I am today.

24:04

Sure. So, you want to have

24:04

stable inflation, and the

24:08

Federal Reserve very much

24:08

focuses on that in terms of

24:12

where they establish interest

24:12

rates. Because in periods where

24:16

the economy is, let's say

24:16

declining, GDP is declining, and

24:20

there's evidence the economy is

24:20

slowing, what the Federal

24:24

Reserve will typically do is

24:24

reduce interest rates, okay.

24:28

They'll reduce those short-term

24:28

rates and make it more

24:32

affordable for people to borrow

24:32

money as we talked about, okay,

24:36

it's usually when people are

24:36

borrowing money that's

24:40

stimulative to the economy.

24:40

Makes sense? Makes sense. Yeah.

24:44

If we're in a period where the

24:44

economy is growing very rapidly,

24:49

okay. That might be good for

24:49

employment, it's a balancing

24:53

act. But if it's causing

24:53

inflationary pressures for wages

24:54

you're trying to slow people

24:54

down in terms of borrowing

24:57

to go up too quickly, for the

24:57

price of products at the grocery

24:57

money. But that also potentially

24:57

affects how much they can spend

25:00

at the grocery store, too,

25:00

right, so.

25:01

store to increase, what the

25:01

Federal Reserve will typically

25:04

You get the point right there.

25:04

If you're paying more to borrow

25:05

do is raise interest rates, same

25:05

concept, to try to make it more

25:09

expensive to borrow money, slow

25:09

the economy down.

25:29

money, right? You have less to

25:29

buy other things. Right, which

25:33

should be a slowing factor on

25:33

the economy. Yeah.

25:36

And I think that, this

25:36

is an opinion, I guess. But in

25:39

the United States, we love to

25:39

spend stuff, like we we're big

25:43

spenders.

25:45

Yeah, two thirds of

25:45

our GDP is driven by spending.

25:48

Yeah, your observations is 100%

25:48

accurate.

25:51

Yeah. So, I mean, you

25:51

figure, you know, convincing

25:53

people to save, rather than

25:53

spend is a challenge in our

25:56

society to a certain degree,

25:56

which I would assume is a big

25:59

reason why, you know, I guess

25:59

that's sort of the other side of

26:02

the coin though. When those

26:02

interest rates go up to try to

26:05

stop people from spending, that

26:05

interest rate also raises on

26:08

things like your savings account

26:08

and your CDs, which encourages

26:11

people, hopefully to save that

26:11

money, and earn some money

26:14

rather than necessarily going

26:14

out and spending it.

26:17

Yeah, I mean, you

26:17

asked a very good question I

26:20

often get, is it better when

26:20

rates are higher? Yeah. Because

26:23

if you're a saver, right, that

26:23

doesn't really have any loans,

26:28

you'd rather have a 4% CD,

26:28

right? Than a 2% CD. Right.

26:33

Okay. But on the other side, if

26:33

you're going to borrow money and

26:37

you're a business, and you want

26:37

to buy a piece of equipment for

26:40

your business, you'd rather pay

26:40

5% for your loan, than 7%. So,

26:47

the net of all that is generally

26:47

what the Federal Reserve has

26:50

found that the impact that the

26:50

interest rates have on borrowing

26:55

money is more significant than

26:55

the impact it has on the saver.

26:59

Okay, okay. So, let's

26:59

talk about the big purchase. The

27:05

purchase that most people, now,

27:05

we could talk about student

27:07

loans, because that's a whole

27:07

other ball of wax. Right? I

27:10

mean, there's a lot of people

27:10

that would argue that an 18 year

27:12

old is essentially buying a

27:12

house when they're taking out

27:15

student loans, but, but let's

27:15

talk about buying a house.

27:18

Right. So, the housing market

27:18

has a big impact on the economy.

27:21

Right. And, you know, during

27:21

COVID, during the pandemic, I

27:25

mean, we saw interest rates that

27:25

we may never see, again, when it

27:28

comes to housing. Like 2.5-3%,

27:28

which, which is pretty crazy. On

27:34

the other hand, back in the

27:34

early 1980s, we saw some

27:37

interest rates for housing that

27:37

were as high as like, 16%.

27:40

Right. So, how does the Fed and

27:40

the interest rates, the

27:43

short-term interest rates you

27:43

talked about that they set. How

27:46

does that impact the long-term

27:46

interest rate of something like

27:48

a 30 year mortgage?

27:49

Yeah, usually the,

27:49

the Fed has more control over

27:53

short-term interest rates than

27:53

long-term interest rates, okay.

27:56

And this gets a little more

27:56

technical. The market, the

27:59

people, the people buying

27:59

Treasury debt that we issue, to

28:03

fund our country, determine more

28:03

the cost of 10 year, 15 year, 30

28:09

year money, but there's

28:09

relationships. Typically, what

28:13

the Federal Reserve does on the

28:13

short end of the yield curve

28:16

does have an impact on the

28:16

longer end. Okay. So, generally,

28:22

if they're increasing rates on

28:22

the short end of the curve,

28:25

which they absolutely control,

28:25

you're going to see interest

28:29

rates move up across the curve.

28:29

That's a general rule. I mean,

28:33

we're in a little bit unusual

28:33

situation for the last year or

28:36

so, but that's I'll say, too,

28:36

too deep of a topic for our

28:40

lighter conversation here. Sure.

28:40

But generally, what the Fed does

28:43

on the short end of the curve

28:43

does impact interest rates as

28:47

you move that.

28:48

So, whenever we talk

28:48

about something like an interest

28:50

rate on a house right now,

28:50

comparatively, the interest

28:53

rates are really not that high.

28:53

I mean, people are still buying

28:56

homes. Right. But the housing

28:56

market is also kind of weird,

29:00

because there's not a lot of

29:00

inventory right now too, nobody

29:02

wants to sell their house. And

29:02

part of that could be because of

29:06

interest rates because they

29:06

bought their house during, when

29:09

it's 2% or something.

29:10

Yeah, let me expand

29:10

on that. Yeah, because we're in,

29:11

Yeah, and you can't blame them

29:11

necessarily. But there's an old

29:13

in a very unusual situation

29:13

today. And it goes back to what

29:17

you just said. In '20 and '21,

29:17

because of the pandemic,

29:21

interest rates were at record

29:21

low levels. Okay. They were at

29:26

levels not seen in 50 years,

29:26

okay. So, as a result of that, I

29:30

mean, the Fed Federal Reserve on

29:30

the short end of the curve, as

29:34

we talked about, basically took

29:34

interest rates down to about 0%.

29:39

Okay, very low. So, based on,

29:39

you know you were going out, you

29:43

were getting mortgages at 3% or

29:43

3.5%. And there was tremendous

29:48

housing activity, tremendous

29:48

refinancing activity of

29:51

mortgages, because you had

29:51

people saying, as you said

29:55

earlier, for my most important

29:55

purchase, man, I can lock in a

30:00

wonderful rate I've ever seen

30:00

and lower my payments. Right?

30:04

Right. And there was just record

30:04

activity. I mean, more mortgages

30:08

were issued to refinance in '20

30:08

and '21, than any other year in

30:09

Chinese curse, yay you live in

30:09

interesting times.

30:13

the history of the country. Wow.

30:13

So, that is actually creating

30:17

the dilemma we're in today,

30:17

okay, because with the inflation

30:21

inflation kicked in, because of

30:21

all the fiscal stimulus that

30:26

occurred, due to pandemic, it

30:26

caused prices to increase, the

30:30

Federal Reserve went on a very

30:30

aggressive tightening campaign

30:34

to increase interest rates. As a

30:34

result of that, mortgage rates

30:39

are now around 7%. Okay, so

30:39

they're more than double what a

30:43

lot of people elected to

30:43

refinance into. So, it's

30:46

creating this shortage of houses

30:46

in the market, because people

30:47

This is. And this

30:47

is, this is one of those things

30:51

are very hesitant to move and

30:51

give up their 3%, 3.5% mortgage

30:55

to now buy a house for a 7%

30:55

mortgage, I mean, the amount of

30:59

the increase in the monthly

30:59

payment is significant. So, it's

31:04

been a very interesting time,

31:04

I've never seen in my career

31:08

where, even though interest

31:08

rates for mortgages are much

31:12

higher than they've been, but

31:12

probably more reasonable by

31:16

historical standards, right?

31:16

There still tends to be when a

31:20

good house comes in a market a

31:20

lot of demand, they're selling

31:24

quickly, they're getting full

31:24

price. It's because there's not

31:29

enough inventory looming onto

31:29

the market. That's kind of a

31:33

complicated. But it relates,

31:33

goes back to the number of

31:37

mortgages that were refinanced

31:37

at these record low rates.

31:41

People were very hesitant to

31:41

want to walk away.

31:53

where, you know,

31:54

I don't know that

31:54

anybody has ever seen anything

31:56

quite like this before. There's,

31:56

there's a lot of historical

32:00

dependency when we talk about

32:00

the economy and finances and

32:04

trying to understand where

32:04

things might go in the future.

32:08

And when you run into something

32:08

like the pandemic that has never

32:11

historically happened, it makes

32:11

it very difficult to predict how

32:14

things are going to play out because you don't have that historical knowledge to base

32:16

your ideas. Yeah,

32:18

I mean, the phrase

32:18

we often use is unintended

32:21

consequences. Right? And that's

32:21

kind of an unintended

32:24

consequence coming out of the

32:24

pandemic, where rates were so

32:28

low people walked in such great

32:28

pricing on their their

32:31

mortgages. Yeah, they don't want

32:31

to leave. So, what you see

32:34

people doing more is home equity

32:34

lending, right home equity

32:38

borrowing, they're electing to

32:38

more money into their house. So,

32:43

yeah.

32:43

So, essentially, rather

32:43

than moving to another house,

32:45

I'll just make my house what I want it to be.

32:47

Exactly, exactly

32:47

and Lowe's and Home Depot are

32:50

Yeah, that's, that's

32:50

yeah, that's yeah, you got to

32:50

very happy. think about that, too. I mean, I

32:55

would argue, there's, there's a

32:59

certain amount of that that

32:59

happens with vehicles and stuff,

33:02

too. There was a huge shortage

33:02

in vehicles, new vehicle

33:05

availability for a while there.

33:05

And people were repairing what

33:08

they had, rather than, you know,

33:08

buying new.

33:11

Or and it drove,

33:11

during that period drove us car

33:14

prices up to record levels as

33:14

well, because, again, shortage

33:17

of cars on the market. So, but

33:17

that seems to have leveled off

33:21

now, but.

33:22

I just think that it's

33:22

really fascinating when you

33:24

start thinking about the fact

33:24

that something as simple as an

33:28

interest rate is really, at the

33:28

core responsible for all of his

33:32

spider webbing that goes out

33:32

throughout the economy. You

33:35

don't always think about that.

33:35

Yeah, no. And I think that's a

33:38

big...

33:39

I agree, and I think this is a very good discussion we're having because

33:40

it goes back to those 12 people

33:44

that meet eight times a year in

33:44

Washington, have a big impact on

33:49

interest rates, and that just

33:49

spiderwebs through the economy

33:52

as your phrase, so absolutely.

33:52

And it impacts everything,

33:56

everyday, everyday people in all

33:56

kinds of ways.

33:59

Yeah, and when you

33:59

start thinking about interest

34:02

rates, you start thinking about,

34:02

as you pointed out earlier, both

34:05

the term of the loan and then

34:05

the size of the loan, if my

34:09

credit card went from, say 5% to

34:09

7%, which is crazy, no credit

34:13

card would ever be that low, but

34:13

I'm just saying it would be a

34:15

non-event, right? Because my

34:15

balance is hopefully not in the

34:20

five or six digits, right. But

34:20

at the same time, you know, a

34:24

housing when you're talking

34:24

about buying something that's a

34:26

home that's $250000, $350000,

34:26

$450000, maybe even more, that

34:31

2% interest differences is huge.

34:35

Back early, where

34:35

we started the conversation, 2%

34:39

or 3% higher interest rate over

34:39

a 20-30 year term. Yeah, that's

34:45

a big deal. You're paying a lot

34:45

more interest. Yeah, you really

34:48

are.

34:49

So, let's just briefly,

34:49

I just want to talk too about

34:51

the fact that it's not only just

34:51

the domestic impacts that

34:55

interest rates have, but they're

34:55

also impacts on interest rates

34:58

that happen throughout the

34:58

world. Correct. So, you know,

35:01

again, we could get into

35:01

probably several episodes worth

35:04

of discussion about world events

35:04

and how it impacts things. But

35:08

at the end of the day, those 12

35:08

people in Washington are also

35:11

looking at not just what's

35:11

happening in our country, but

35:13

what's happening in our neighboring countries, what's happening across the world. And

35:15

that impacts, to some degree,

35:19

their decision making as well.

35:19

Correct? Correct. Yeah.

35:21

I mean, it's really

35:21

United States as the strongest

35:24

economy in the world. We do.

35:24

Okay. China has a very large

35:27

economy. But at the end of the

35:27

day, it's a global economy,

35:30

because so much, so many of our

35:30

businesses here, deal with

35:35

international partners or sell

35:35

product internationally and

35:38

such. So, yeah, so the Federal

35:38

Reserve Board of Governors,

35:42

obviously, watches carefully

35:42

what's happening in the world.

35:47

And what you're trying to avoid,

35:47

as is volatility. And, and

35:51

again, kind of the times we're

35:51

in when you see instances of

35:54

war, war in Ukraine, war in

35:54

Israel, creates more volatility

35:59

in the system. They're

35:59

ultimately first focused on the

36:02

US in our situation, but because

36:02

of this global economy, they

36:08

have to be cognizant of what's

36:08

happening.

36:10

Yeah. Yeah. And I

36:10

think, you know, again, without

36:11

And really where it

36:11

became more visible was during

36:12

getting into a lot of details,

36:12

you start thinking about the

36:16

fact that it becomes sort of a

36:16

yin and yang, where, say a

36:16

the pandemic, because where

36:16

there were companies relying on

36:19

company is dependent on making

36:19

widgets, right, and the material

36:23

to make that widget is in a

36:23

certain country, right? And that

36:26

country is unstable. Well, now

36:26

the raw materials you're buying

36:29

from that country to make your

36:29

widgets is more expensive, which

36:33

means your widgets more

36:33

expensive, which, it's the

36:36

snowballing effect. Exactly. So,

36:36

when you know, people say like,

36:39

well, why in the world does

36:39

something happening halfway

36:43

across the planet impact my

36:43

savings interest rate? On my

36:46

little savings account. Right?

36:46

That's, it is a snow, it is a

36:49

sort of thing that rolls downhill. products from other countries,

36:58

and it became more difficult to

37:03

get those products in, or they

37:03

couldn't get as much of that

37:06

product. You saw what? The same

37:06

demand for fewer products, right

37:12

goes up goes up. Right? And that

37:12

really was prevalent during the

37:15

pandemic, and it really exposed

37:15

some weakness in our supply

37:17

chains as a country.

37:19

Oh, yeah. Anybody that

37:19

couldn't buy toilet paper or, or

37:23

cleaning products. It was crazy.

37:23

There was a time when you

37:27

literally couldn't walk into any

37:27

store and buy soap. Yeah, right.

37:30

So, it's crazy.

37:31

So, like things

37:31

like chips for comp[uters], you

37:33

know, computers and technology.

37:33

I mean, that's why I think

37:36

you've seen more of an effort to

37:36

bring some of that important

37:38

production into the United

37:38

States, because I think one of

37:42

the lessons coming out of the

37:42

pandemic is, you know, some of

37:45

these parts are so important to

37:45

the production of a car or

37:48

whatever. Yeah, you want more

37:48

control of your supply chain,

37:52

and you have better control if

37:52

it's in the United States versus

37:56

it's in China or Taiwan.

37:58

Yeah, yeah, I mean,

37:58

even even just crazy things like

38:00

you know when the Suez Canal was

38:00

being blocked, you know, by that

38:03

ship that broke down, it wasn't

38:03

even that, wasn't even

38:06

necessarily a malicious event.

38:06

It was just an event that

38:09

stopped everything from passing

38:09

through a very important port,

38:13

or channels to be able to get

38:13

products to the rest of the

38:16

world. It was crazy. So, well,

38:16

you know what I mean, this has

38:19

been a fascinating discussion.

38:19

And I'm sure we could go into

38:23

even more depth. But I just want

38:23

to thank you very much for

38:25

coming and talking to us about

38:25

this. I think that trying to

38:28

understand how something as

38:28

simple as an interest rate can

38:31

affect so many aspects of your

38:31

life is just really important to

38:34

understand when you're dealing with your finances, you know, when you're trying to decide

38:36

where your money should be and

38:39

what you should buy and what

38:39

may, maybe you shouldn't buy at

38:41

that particular time, things

38:41

like that. Just understanding

38:44

how that number matters to you

38:44

is important.

38:48

I appreciate you

38:48

inviting me in for the podcast.

38:52

Yeah, absolutely. You're welcome

38:52

back anytime glad to come back

38:54

and no, and it's a complex

38:54

topic, it is. And yeah, I think

38:58

we tried to keep it at a level

38:58

that is more understandable for,

39:03

for individuals but, you did a

39:03

great job. You did a great job

39:10

moderating the podcast, but

39:10

it's, it there's the, I like

39:14

your spider web example. This

39:14

impacts so many, interest rates

39:18

and inflation and monetary

39:18

policy just impacts so much of

39:24

our daily lives that I think a

39:24

lot of people just don't realize

39:27

that, so hopefully we provided

39:27

some background and context that

39:31

could be helpful. Absolutely.

39:33

And, and like, like

39:33

we always say, you know, please,

39:35

you know, check with your

39:35

financial advisor, with a banker

39:38

that you trust, somebody that

39:38

understands this stuff. If you

39:41

have questions, you can always

39:41

message the show, we can we can

39:44

try to give you some pointers,

39:44

but at the end of the day, you

39:47

should talk to somebody that you

39:47

know that understands your

39:49

finances and make your decisions

39:49

based on that. If you haven't

39:52

had a chance to subscribe to the

39:52

podcast, please do that. It

39:55

really definitely helps us out.

39:55

Plus, you'll be notified every

39:57

single time that a new episode

39:57

drops, and which is every other

40:00

Tuesday, essentially. And yeah,

40:00

so thanks. Thank you very much

40:04

once again, Jeff, appreciate it.

40:06

Thank you, glad to be here.

40:15

This podcast

40:15

focuses on having valuable

40:17

conversations on various topics

40:17

related to banking and financial

40:20

health. The podcast is grounded

40:20

in having open conversations

40:23

with professionals and experts

40:23

with the goal of helping to take

40:26

some of the mystery out of

40:26

financial and related topics, as

40:30

learning about financial

40:30

products and services can help

40:32

you make more informed financial

40:32

decisions. Please keep in mind

40:35

that the information contained

40:35

within this podcast and any

40:38

resources available for download

40:38

from our website or other

40:40

resources relating to Bank

40:40

Chats, is not intended, and

40:44

should not be understood, or

40:44

interpreted to be, financial

40:47

advice. The host, guests, and

40:47

production staff of Bank Chats

40:51

expressly recommend that you

40:51

seek advice from a trusted

40:53

financial professional before

40:53

making financial decisions. The

40:57

host of Bank Chats is not an

40:57

attorney, accountant or

41:00

financial advisor, and the

41:00

program is simply intended as

41:03

one source of information. The

41:03

podcast is not a substitute for

41:06

financial professional who is

41:06

aware of the facts and

41:08

circumstances of your individual

41:08

situation.

41:22

Understanding interest rates and

41:22

how they affect your financial

41:25

health can be complex. But

41:25

ultimately, knowing the basics

41:28

is enough for most of us. A

41:28

higher interest rate could put

41:32

more money in your pocket if

41:32

you're saving or investing,

41:35

while increasing the cost of

41:35

borrowing money as well.

41:38

Ultimately, having a trusted

41:38

financial advisor to help you

41:41

through the ups and downs is

41:41

always a good idea. We are very

41:45

grateful to Jeff Stopko,

41:45

president and CEO of AmeriServ,

41:48

for joining us on the show, and

41:48

we hope to have him back again

41:51

in the future. I also want to

41:51

thank Jeff Matevish for his

41:54

production and transcription

41:54

skills, and to thank you, our

41:58

listener, for subscribing to the

41:58

podcast. If you're new to the

42:01

show, I invite you to consider

42:01

subscribing as well. AmeriServ

42:05

Presents Bank Chats is produced

42:05

and distributed by AmeriServ

42:08

Financial Incorporated. Music by

42:08

Rattlesnake, Millo, and Andrey

42:12

Kalitkin. You will find all of

42:12

our episodes on our website

42:15

ameriserv.com/bankchats, or by

42:15

searching for the show on your

42:19

favorite podcast service. For

42:19

now, I'm Drew Thomas. So long.