Rough Sledding

Samuel Baynes |

Samuel Baynes, CRC®
Principal | CCO                                                                                                                                                                                                                                      Executive Leadership

How much will the Federal Reserve pay banks not to lend money?  At a 4% Fed rate the government will be paying banks over $200 billion a year for Interest On Reserve Balances! 
Wait till the politicians see that bill. For a full explanation see 

Here’s the deal, the Fed rate is the target rate that the Fed wants banks to charge to lend money to each other overnight.  The Fed currently pays banks 3.15% on reserve balances in each banks Federal reserve account.  There is no incentive for your bank to lend money at a rate lower than that.  So, interest rates for everyone to borrow go up as a result.  

In the past the Fed managed interest rates using a scarce reserves model.  It could add or subtract available reserves for banks and let them compete with each other for them.  That competition set the interest rate banks would pay each other for those reserves in the few circumstances when they needed them.  But now they use an abundant reserves model where there are so many available dollars that the rate is essentially zero.  Too much money.

So, the Fed created the IOER.   Which is now the IORB.
The Fed now controls the cost of money artificially, it has too because there is too much cash..

Setting a floor on rates is the now the Fed policy to “fight inflation”.  I’m sure inflation will go down…at some point.  But it will most likely have more to do with the economy finally absorbing all the extra cash (think quantitative easing) printed during Covid and the last 14 years (since 2008) than it does with the Fed raising the overnight rates.  At some point since the Fed owns bonds at very low interest rates it will be paying out more in interest on reserves than it is earning. So much for our tax dollars. 

Right now, the stock market is doing most of the hard work fighting inflation.  It has been rough sledding this year for sure.  It is easy to get discouraged when looking at valuations, but this happens sometimes and its temporary!  It won’t be like this forever.  September is always the worst month. Add in inflation and global issues and you get bad soup.
The market has taking a beating, but there are opportunities out there.

My outlook for the rest of the year is cautiously optimistic, especially later this year.  Until then it could be rough sledding but I still think the economy could have a relatively soft landing.
Just remember it always darkest before the dawn.  Stay the course.

Have a great week!  And thank you for your business.

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Data sources: Baynes Investment Counsel LLC ®, Baynes Investment Counsel LLC Research 2022 ©, First Trust,   US Dept. of Labor Statistics, AAM,  
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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